Potential Inflation Issues
Twitter and Square CEO Jack Dorsey is the most vocal and alarming figure in the finance world who is not just raising the alarms on the potential coming inflation issues but is banging bells and yelling from the towers about the possible coming problem.
Dorsey said in a tweet, “Hyperinflation is going to change everything. It’s happening.” When replying to another tweet about inflation, he went further to say, “It will happen in the U.S. soon, and so the world.”
While there have been other big-name investors, bank c-suite members, Federal Reserve members, and even the Treasury Secretary indicate that inflation will happen. Some have even said it is a little higher than what they expected. However, not many have said Hyperinflation was coming and would happen soon in the U.S. and then the world.
While some have and will continue to dismiss Dorsey’s claims, we all need to remember that he is the CEO of Square, the payment company. So theoretically, Dorsey has access to information that others may not have, which could give him a better insight into how fast prices are increasing and what products are seeing big increases, which would undoubtedly help guide the thinking that higher than expected inflation is on its way. (Just a thought).
But regardless of whether or not you think Jack Dorsey is correct about the Hyperinflation, the fact remains that we are in an inflationary period right now, and there really is no end in sight. So as an investor, taking certain small steps to help protect your portfolio may be a good idea at this time. So let’s take a look at a few different options you have.
The first would be the Treasury Inflation-Protected Securities or TIPS. TIPS are government Treasury bonds that have a built-in feature that allows the interest rate on the bond to increase with rising inflation. This protects investors from inflation when invested in longer-term Treasury bonds. Something like the iShares TIPS Bond ETF (TIP) or the Schwab U.S. TIPS ETF (SCHP) would be great options for any investor that wants to gain exposure to these TIPS bonds.
The next would be certain commodities or just commodities in general. When inflation occurs, items such as commodities with a fixed supply amount are usually the first items to rise in price. This is because commodities are typically the raw materials that other items are made from. Therefore, if demand for certain products is high and supply is set or can’t be increased easily, the price of that commodity will go higher until the demand and supply balance themselves out. Investing in gold, oil, lumber are all commodities that see prices move based on supply and demand. A few ETFs you could invest in would own just a single commodity like gold (SPDR Gold Trust (GLD)) or own a basket of commodities like all three mentioned above (Invesco D.B. Commodity Index Tracking Fund (DBC)).
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Another option is to invest in real estate. During times of inflation, hard assets usually see their value rise, like commodities. And the arguably largest hard asset is real estate. Inflation will push the price of building materials higher, which pushes the purchasing price of both new and used homes and buildings higher, making real estate investors who bought before the run-up in price wealthier. Furthermore, rents typically increase during inflationary times because purchase prices go higher. So investors who are in the rental market not only see asset price appreciation but also rent or revenue stream increasing. Finally, investors can invest in a few REIT ETFs if they don’t want to buy the real estate themselves. The iShares U.S. Real Estate ETF (IYR) and the U.S. Diversified Real Estate ETF (PPTY) are two of many good options for investors looking to gain exposure to real estate.
I left out stocks, bonds, and cryptocurrencies on this list. However, those are also options and good ones at times. However, certain stocks and short-term bonds are not the ‘best’ options if you think inflation will continue. And Cryptocurrencies will probably do well in high inflation, but the fact is we don’t know because crypto is a new thing, and it just hasn’t been around during a time of high inflation. So, while theoretically, they should do well, it carries more risk because it is not a proven theory.
At the end of the day, though, investors need to remember that some inflation is good and that we shouldn’t panic and overreact to that. This means you should put your whole portfolio in these inflation protection types of investments. Even if Dorsey is correct and Hyperinflation is around the next corner, investing is a long-term game, and Hyperinflation won’t last forever, so having some protection is a good idea, just don’t go overboard with it or making changes to your portfolio now could do more harm then good.