April was a bad month. Inflation is kicking in big time. As a result, the federal reserve will likely be raising interest rates and already has somewhat. In the short term, the stock market is down. The long term prospects have not changed. Eventually recession and inflation issues will be resolved, or at least not a crisis. Sometimes these dips last a month, sometimes over a year. We, of course, cannot say when. So, the question comes up.
What is Inflation?
Inflation is the general increase of the cost of goods in an economy. As a result of things being more expensive each dollar is worth less. The reason is because each dollar has less purchasing power. For example, if you have 3 dollars in your pocket and candy costs 1 dollar each, your wealth in real terms is 3 pieces of candy. If the cost of a piece of candy went up to 1.5 dollars, then your wealth in real terms decreased to 2 pieces of candy. You are poorer now as a result of inflation.
The most effective way to protect your wealth from inflation is investment. The reason is because investment assets at their core are goods that people buy. Inflation means that goods get more expensive. Therefore, inflation makes investment assets more valuable. So, you have potentially more money to pay for the various things you want to buy. Your wealth is partially protected. This situation is in complete contrast to leaving your wealth in cash. Cash has no protection against inflation and loses value over time.
The way our firm protects accounts from inflation is mainly though investing in stocks and stock mutual funds. Remember a stock is a piece of a company. When the company does better, the stock does better (most of the time). Let’s say that the company whose stock you own sells chairs. Because of inflation, the cost of those chairs goes up and the company makes more revenue. If the increased revenue exceeds the increases in the company’s expenses, the company will make more profit and the stock will likely go up. This increase of asset value will partially mitigate the decrease in value of the rest of your wealth due to inflation.
The other popular way for people to protect their wealth from inflation is by investing in real estate. As inflation goes up, land lords charge more rent, which for those landlords partially counteracts the detrimental effects of inflation. Our company doesn’t invest in real estate directly, but we do invest in a variety of real estate mutual funds.
If you have any questions about your investments (or your tax), please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.
Thank-You,
Daniel and Eli
As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.
If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.
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