Tim’s Regular Coffee Just Cost Me $1.79.

I recently went to Tim Hortons with my 3 kids to enjoy a cup regular coffee. As is often the case with them, I had to pick up the tab; and was shocked to pay $1.79 each. The total bill before tax (that’s another story) was $7.16. I recall spending quality time with the kids at Tim’s at the end of 2019 and only paid $1.52 per cup or a total of $6.08.  In 2 years, the cost of a regular coffee rose 17.76%. That my friends, is called, “Inflation”.

The official overall inflation rate is currently trending at 4.4%. If your income (including investment income) remains the same over time, but inflation causes the prices of goods and services to increase in price; it will take a larger percentage of your income to purchase the same goods and services in the future. This hits people who are retired especially hard as their incomes usually are not rising with inflation.

For those of you keeping track, we haven’t witnessed such an increase in inflation since the early 90’s. In fact, what we have experienced over that period to today, could be characterized as a deflationary environment, which occurs when the purchasing power of money increases and prices decline. This has been particularly noticeable in mortgage rates your kids have been obtaining.

That’s about to change. Whatever investments that have worked more recently will not fare well going forward.

So what do investors do to protect their Portfolio’s?  Actually using a baseball analogy, we are at the 1st or 2nd inning of increasing inflation/interest rates. This doesn’t mean there will be runaway inflation, but I suspect it will trend higher than what we have experienced in the last several years.

We will explain which investments work during increased inflation and which ones to avoid.

There are five Asset Classes and are each impacted by inflation:

• Cash/HISA – Poor as you lose purchasing power daily, unless you spend it.
• Fixed Income/GIC’s – Really Poor (longer dated maturities avoid) as you are 100% guaranteed to lose purchasing power.
• Equities – Actually mixed (especially at the outset), but some industries/companies are very good to not as good:
• The very good include: Companies who have pricing power (think Alcohol Companies), Value Companies, Energy Companies, Financials, Base Metal Companies, Infrastructure and Precious Metals.
• The not as good (or delayed) include: Companies/industries who have low pricing power (can’t pass increasing costs to consumers), including Growth Companies (companies that are expensive), today they are Technology related, or are paying high dividends (think Utilities).
• Real Estate – very good. REIT’s or Commercial Property (principal residences may be different as it depends on affordably and mortgage rates).
• Other – very good. This area includes gold and collectibles (hang on to your” Whistlers Painting” you picked up at a garage sale for $10).

If inflation is permanent and I only held GIC’s as an a investment; my initial investment is actually worth less as inflation is greater than the interest it generated. Unless I held the above industries/companies, the next trip I make to Tim’s I have to bring one less child as I can’t afford that price increase.

What happens if the experts are correct that inflation is temporary? Then your Portfolio should not be invested as above.

This is why long term clients know that we build Diversified Portfolio’s long before an economic event is obvious. Each position is carefully vetted in the ratio that meets with Modern Portfolio Theory and protects you against inflation, deflation, an attack on the Twin Towers, a financial crises, a pandemic, etc. Whenever clients suggest a change it disrupts the Portfolio’s harmony, and we have noticed it reduces long term returns.