“Cash is trash.” The inflation headlines we have all been reading in recent weeks may bring about increased stress around your financials. After all, with the average Canadian family expected to shell out an additional $1,000 at the grocery store in 2022 — it is a valid concern. However, hoarding cash in your chequing or savings account will do little to protect you from these inflationary pressures.
What is inflation?
Inflation is the gradual weakening in purchasing power for every dollar you hold. What this means is, you need more dollars to buy the same basket of goods you did previously. This is brought about in two main ways: cost-push inflation (input costs like raw materials get more expensive) forcing retailers to charge more to make up for this, or demand-pull (demand outstrips supply). In our current world:
- Supply chains continue to feel pressure from continued port shutdowns and a lack of both shipping containers and drivers
- Natural disasters and droughts have hurt crop yields
- Central banks have pumped A LOT of cash into the system and,
- Workers have either left the job market or have re-tooled themselves leaving a glut of job openings for entry-level workers.
As a result, it's costing more for your produce, packages and everything in between to arrive at your doorstep or grocer.
Central bankers believed this would be temporary but have been slowly changing their tune recently and expect these inflationary pressures to persist longer than originally thought.
So this begs the question, how can you protect yourself from inflation:
1. Get a raise
2. Stock up now
3. Reduce debt
4. Put your cash to work
For the remainder of this article we will focus on point 4. For your purchasing power to remain the same, you need to ensure you are earning at least the rate of inflation on your savings. With the majority of banks offering abysmal HISA rates, you often have to turn to riskier investments to break even. While this may be scary to some, it doesn’t have to be.
Common assets that combat inflation include: Banks, real assets (real estate, infrastructure), commodities and inflationary-linked bonds.
Banks and other financial institutions in-directly benefit from a rising inflationary environment. Once central banks raise rates, the yield curve will begin to steepen, and financial institutions will hike rates on their lending products including your variable-rate mortgage, line of credit and other variable-rate debt. This means they increase their profit margins. ETFs to capitalize on this include ZEB, XFN and ZWB.
Real assets include infrastructure — like pipelines, land, real estate, and electric utilities. These assets appreciate in value in-tandem with inflation as they can increase rent, electricity rates and other income sources to their customers. There are several ETFs that capitalize on this including: CGRA, CINF and CGRE.
Commodities & Metals
Commodities like oil, natural gas, copper and iron tend to exhibit positive correlation with rising inflation, permitting economic growth persists. Precious metals like gold & silver, also stand to benefit as investors seek safe havens, out of cash and bonds.
Companies who deal in this space also stand to benefit as they can generate higher returns from selling these commodities at higher prices. ETFs in this space can include gold mining companies like XGD, energy producers like XEG and base metal companies like XBM.
Inflationary-linked bonds, and real return bonds, are fixed income vehicles that increase in-line with inflation. These are more conservative investment vehicles than the aforementioned assets. ETFs to look at include XRB and QTIP.
By creating a diversified portfolio of inflation-sensitive securities, you can help hedge the inflationary pressures we will continue to experience into 2022. If you need a helping hand building an investment portfolio suited to your needs, please check us out at investipal.co
Note: The information contained in this article is not and should not be construed as investment advice, and does not purport to be. The information and opinions provided should not be taken as specific advice on the merits of any investment decision. Investors should make their own investigation and decisions regarding the prospects of any topic covered herein.