Inflation-proof your investments with these expert tips

Bryce: [00:00:31] Welcome to get started investing in this podcast, we cover all the basics that you need to start your investing journey. Are you joining us for the very first time? Is this the start of your investing journey? Well, before you dive into this episode, our feed is designed to go from the very beginning, so we suggest that you scroll up to episode one and start from there. However, if you are feeling brave and just want to dive in with us, then of course, don't let us stop you here at Get Started Investing feed, we unpack all of the jargon and the confusing bits. We hear your investing stories with the goal of making investing less intimidating. And of course, we like to have a good time along the way. My name is Bryce and as always, I'm joined by my equity buddy Ren. How are you going?

Alec: [00:01:10] I'm very good. Bryce excited for this episode. We're talking about inflation, which is fitting because nothing is more inflationary than your GSI opening.

Bryce: [00:01:23] Yes, 10 percent a year, and if you have no idea what we're talking about when it comes to inflation, have no fear. Inflation is here, but we're going to cover it in a second. But before we jump in a bit of housekeeping each year, we have our community survey, which really helps us to understand more about you so that we can make better content for you over the next coming year. And the survey is now live. The link is in the show notes. It's also available on our Instagram page in our bio. And it's only going to take you 15 minutes. If you complete the survey, you go in the draw to win 500 bucks. So if there's anything that you're going to do this week, it would be great if one of those things is to fill out our community survey.

Alec: [00:02:03] Yeah, it helps us. And if you enjoy this show, any of the other shows in our network, if you want to help us direct our content decisions and everything else we're doing, it is a massive help. It's the most helpful thing you could do if you've had found any value in any of the dribble that we've put out on podcasts for the last four and a half years. But let's get into today's episode because this is a big topic and a topic that is capturing a lot of headlines. It is inflation. Yes. So we're going to cover what it is, where we're actually saying it. And then what's an investor to do?

Bryce: [00:02:40] What's an investor to do?

Alec: [00:02:41] That's really the question. That's the key. Let's start at the very beginning for people that may have heard the term and instantly turned out because it's a pretty boring topic inflation and it's reported in an incredibly boring. Yeah. Hit me with it. You can't be boring.

Bryce: [00:03:00] Inflation refers to the overall rise in prices of goods and services in the economy. Boring. Yes, that's it. In a nutshell, there's nothing complicated about it if you feel overwhelmed and confused. It's the inflation of price.

Alec: [00:03:15] Yeah, prices are in an economy. You remember when your grandparents would say milk used to cost five cents and you're getting there in the pie, the footy was $5, and now you're like, Well, the beer alone is 15. Yeah, that's inflation. That's inflation. Prices rise in an economy, and that's good. That's a part of life. And you want to say that that's healthy two to three percent a year is what governments around the world aim for. But right now, we're seeing numbers that are far higher than that. And when we say two to three per cent a year, what we mean the central bank gets an economist's, get a basket of goods that we generally buy the milk, bread, school fees. I don't actually know everything that goes into it, to be honest. Clothes, not petrol. No, not petrol. Not real estate, not housing.

Bryce: [00:04:08] Yeah, all these things that should be in it.

Alec: [00:04:10] Yeah, yeah, yeah. But your electricity bills, your water bills, basically things that we spend money on and they measure the change in that that basket of goods every year. That's how they measure inflation. So they want to see it go up a little bit. That's a sign of a healthy economy, but they don't want it to go up massively. That's the sign of inflation that could become a concern. Yeah. So this is going to sound like we immediately have come there's been no break, but there has been because Bryce wanted to find exactly what was in the basket of goods. Turns out that it's hard to find. There are 11. So this is in Australia, but it's it's broadly reflective of wherever you are in the world. There are 11 groups of spending food and non-alcoholic beverages, alcohol and tobacco. That would be a big waiting for, you know, clothing, clothing and footwear, housing, furnishings, household equipment and services, health, transport, communication, recreation and culture, education, insurance and financial services. So there the 11 categories. And then if you read down on the Australian Bureau of Statistics website, they start talking about 87 expenditure classes that they group things into, and that's where I get a little bit lost. Yeah, that's basically it. They basically try and measure all your spending. Yeah, as a general, everyday consumer, yes. So Bryce, we've said the government's aim for two to three per cent but more than two to three per cent is bad. Explain that why is about

Bryce: [00:05:45] it is bad because it erodes the value of your cash really quickly.

Alec: [00:05:50] Okay, that's doesn't sound good. That doesn't

Bryce: [00:05:53] sound good. Yeah. If inflation is is too high, the what you can buy, it today becomes far less. Your purchasing power becomes less in the future. And so if your salary is not rising in line with inflation, you're essentially able to buy less and less. And if that is at extraordinary levels, it's not a good thing.

Alec: [00:06:18] It really hurts lower earners as well, and it really can exacerbate inequality if you aren't getting big pay rises to keep up with inflation. Your money buys less and less, and that can be really harmful to consumers. And then that has flow on effects to the broader economy because then people aren't spending as much and then that affects businesses. That, in fact, affects consumer confidence. Yeah, it can. And then that can sort of ripple through the economy. If people aren't spending as much, then perhaps businesses have to cut employees at the same time because there's inflation, employers are asking for higher salaries that squeezes businesses on both both sides. And so it can have pretty harmful ripple effects to the economy throughout the economy. Or you say wage price spiral, which is where you see high inflation so businesses raise their wages, what they're paying, but then prices keep rising and then wages keep rising. And you don't want to say that, you know, a little bit of inflation is healthy, but too much evidence of inflation can really hurt consumers and especially consumers on lower incomes.

Bryce: [00:07:28] Yeah, but two to three per cent band is the healthy band. Central governments try to maintain the inflation rate, but we are seeing inflation around the world at a higher level than that two to three per cent band, which is why you're likely to be saying the word inflation in headlines all around the world. So globally, inflation numbers, let's have a look. America is pumping out inflation at seven percent. So what does that actually mean? It means the price of this basket of goods are compared to 12 months ago has increased seven per cent.

Alec: [00:08:06] Yeah. So things in America are seven percent more expensive. Or in another way, your money can buy seven percent less than it could a year ago.

Bryce: [00:08:16] And if you haven't received a pay rise to the extent of seven per cent, then you can immediately see that you're having to pay more for things now than you were 12 months ago, and you're worse off. Mm-Hmm.

Alec: [00:08:28] So America captures headlines with seven percent for 2021. It actually in the most recent numbers, was higher than seven percent in the UK, 5.4 percent Australia three and a half percent. So, not so not too bad compared to the rest of the world. South Africa four point four percent, New Zealand five point nine percent You can see the trend here wherever you are in the world. Inflation is a story, and some of the the reporting out of the UK was pretty, pretty heartbreaking. The households in the UK are suffering the biggest fall in income in three decades. One in 10 households do not have enough money for food and the use of food banks is soaring. Now, obviously, that's not only because of inflation. There's a lot deeper economic issues at play in the UK at the moment, but inflation can have a really amplifying effect on inequality.

Bryce: [00:09:28] Mm-Hmm. Yeah, not great to see to see those statistics coming out of the UK.

Alec: [00:09:33] And we'll get to the investing side of it later. But that is particularly the case for those that own investments and those that die. Bryce: [00:09:42] So Ren, let's have a look at the sectors in which we're seeing a lot of this price inflation coming through in the economy. Alec: [00:09:51] Yeah. Well, we over on Equity Mates, we did an episode. The release came out yesterday on the oil industry because oil prices are just going bananas at the moment. And when oil and gas prices hit all time highs, that has a real flow on effect to the rest of the economy because as much as we don't like to think about it. Oil is in everything. It moves, everything it powers, everything. It is involved in everything. And so when oil prices high, every business is exposed to that in some way and they're paying more and then they pass those prices on. Bryce: [00:10:29] It's just that ripple effects straight through to the consumer, which is unfortunately you and I Ren. Alec: [00:10:36] So to give you some context. One of the benchmark oil prices, West Texas Intermediate, it don't have to worry about what that is, but the price of oil opened 20 to 64. Dollars is now in the mid 90s, so it's up over 40 percent in like six weeks. Yeah, so that's that's reason one that the cost of energy is increasing. Bryce: [00:11:00] That's one. And you might not have felt that in your hip pocket. Alec: [00:11:04] All right. Anyone that drives a car, of course, Bryce: [00:11:06] if you're driving a car. I don't own a car. Haven't felt it. Actually, I do on a car, actually, now that I think about it. Alec: [00:11:12] But Bryce owns the I never drive the car for a guy that's like a bit of a, you know, plain cart always looking sharp. His car is, let's say, his car is much more a Ren than a Bryce. Bryce: [00:11:26] through no fault of my own I add. But somewhere that we I've definitely seen it and felt it. And that is in our supermarkets Ren, where we've seen higher costs for so many of the well, we've seen higher costs for products in supermarkets. And if we think about why that's happening, it's because a lot of the inputs that go into creating the products in our supermarkets and getting our products onto the shelf, they're becoming more expensive. Sugar, edible oils, meat, dairy, eggs, even freight supply chain. Alec: [00:11:59] I thought you were just going to talk about the cost of your edibles. Bryce: [00:12:02] No, no, not true. All of these key inputs have been experiencing rising prices. And so that's flowing through to the cost of our food on our shelves. Yeah. Alec: [00:12:12] So in Australia, the investment bank Barrenjoey flagged mid to high single digit price increases from major supermarket suppliers. So, you know, that's sort of four to five percent up to nine percent increases, which is the highest in a decade. A number of major global packaged goods makers are passing on cost increases, so General Mills, which make a bunch of your cereals costs, are up seven percent. Unilever high teens Mondelez, Kraft Heinz, they've all announced sweeping price increases. Some of Kraft's highest Hawkins's prices have gone up as much as 20 percent. Wow. Like, that's a big jump for, you know, wherever you are in the world. The UK, Australia, the US. We've seen massive price wars in food and we've seen prices go down over the past decade, especially Aldi and Lidl just really take that competition to the next level. And for the first time in over a decade, we're seeing meaningful price increases for food. Bryce: [00:13:19] Mm-Hmm. So Ren to kind of summarise all of that, we're seeing inflation come through because oil as an input, it affects everything. It's going up in price. We know that Covid has had an impact on labour, so labour shortages is hurting Alec: [00:13:35] the great resignation, Bryce: [00:13:36] great resignation and commodity costs, which we just spoke about. Everything that's going into our food is also experiencing price rises and flowing on to our consumer, to us as consumers. Alec: [00:13:47] Yes. So if energy is a price, is an input into everything labour, you know, you've got to pay workers more to get them to do to to work for you. That's an input in basically everything. And then the commodities, the raw inputs that you use to make products. If all those three things are going up, it makes sense that we're seeing prices go up. That's across the economy. Bryce: [00:14:09] So then the question is what is an investor to do? And we're going to answer that on the other side of this break. So let's take a quick one to hear from our sponsors. So Ren inflation, a lot of headlines. You know, it's something that we haven't necessarily experienced to this extent over the last few years as investors. So that begs the question of just set up a portfolio. What should I be doing? Alec: [00:14:35] Let's talk about some of the major asset classes and how inflation affects them. And then we have gone deep on some of the best personal finance experts out there to talk about what we should do. But let's start with how inflation affects assets. So let's start with real estate housing as inflation goes up, as prices go up, the price of real estate goes up as well. Your dollar can buy less real estate in the same way it can buy less food from the supermarket. And so you say, if you own real estate, you say prices go up as inflation goes up. That's a pretty simple one. Bryce: [00:15:13] So let's talk about commodities. Gold, for example, very similar to real estate. It's a hard asset. Price goes up as inflation goes up, currency gets weaker, becomes more attractive. You can buy less of it. It goes up. Yeah. Alec: [00:15:32] Here's one that isn't going up bonds. If you have a bond that pays you one percent and inflation goes up, then that bond becomes worth less because you're not even keeping up with inflation and you're falling further and further behind as inflation goes higher and higher. Bryce: [00:15:48] That leaves us with stocks Ren, and it's not as simple as the others. It either goes up or down. It goes down because there are plenty of nuances within the stock market. So let's start with companies that have pricing power. Alec: [00:16:02] Yeah. So a company that can raise their prices in line with inflation, they do well. So a company like Transurban that runs all the toll roads in Australia or, you know, similar equivalents overseas, if they can rise that raise their prices because they're the only way for you to get from A to B, then they're going to be fine with inflation. They'll raise their prices and you'll still drive on that road. Yes. But that then takes you to companies that don't have pricing power. Bryce: [00:16:32] And they suffer. They suffer because they don't have the luxury of being able to raise their prices given the competitive dynamic that they're in or the type of business that they run. We're not willing to pay for higher prices. Those companies are companies that you don't necessarily won't be too exposed to, for example, energy companies. Alec: [00:16:51] Yeah, in particular, companies that have like there's regulatory environments that cap price increases, then you're in trouble. I think now UK listeners do your own research on this, but I think like UK, a lot of UK waterworks are publicly listed, but they're regulated in how much they can raise prices. So if you can only raise prices two percent, but inflation is seven percent, that's a bad business to be in. Bryce: [00:17:16] Yeah, yeah, yeah. So then we turn to the commodity producers that you can invest in. So I think your miners, you're oil companies. Well, let's use oil as an example. We're seeing oil get more expensive. That's great for oil producers because the higher the price, the more revenue, Alec: [00:17:34] the more money they make. And so those those that sell commodities at higher prices do well, but those that buy commodities at higher prices do poorly. So we mentioned a bunch of the packaged food makers the Kraft Heinz, the General Mills, the Mondelez. They have to buy these these food commodities and they have to buy them at higher prices, and then they have to hope that they can pass those prices on, but they're going to get pushback. And so they might not be able to pass all of the price increases on and they just have to wear that and that affects their profit. To sum up, you want to find companies that have pricing power and can pass price rises on to whoever's buying whatever they're selling. And then if you're one of then the companies that have to co-op those price increases or compost price increases on, they're the ones that struggle a little bit more. Bryce: [00:18:27] So Ren, you mentioned that we've collated a bunch of information and advice from some of the best financial experts out there, and we've done so because we've got a bunch of questions come in via Instagram that that bordered on personal financial advice. So we're going to leave it to the experts. But though they were questions around, you know, should we buy our inflation hedges, not garden hedges, if that's what you're thinking, what to do with existing investments, how should I think about my portfolio and diversify? Do I stick long term? Think about ETF investment strategies? You know, all of those sorts of questions steered clear steer clear of tech. So we're going to take a look at what some of the pros are saying to help answer these concerns and questions. Alec: [00:19:10] And then I'm going to finish with one of the worst pieces of advice of advice from the pros because we might not be able to give you specific advice, but I can sure as hell. A size this piece of advice show, but the first piece of advice from an expert that we thought was an important reminder was be careful of holding too much cash. And that's from a financial planner over in the US. James Burton, who reminded us that we should have enough money to cover three to six months of living expenses. So that's your emergency fund. If you lose your job, you want to have enough money in the bank that you're not, you know, you're not panicking, that you've got an emergency fund in place. But that's it, according to James. The truth? He says it's tempting to keep a lot of money in cash because it feels secure. But the truth is it's not secure. It is likely to be eroded by inflation very significantly over time. So have your emergency fund. But then any other money? Make sure you're putting it in investments in assets that at least keep up with inflation. Bryce: [00:20:15] So number two is opt for stocks and tips, which are Treasury inflation protected securities. A lot of jargon, there's a lot of jargon, but it's a good strategy to to diversify across different types of investments. For instance, stocks more than bonds tend to keep up with inflation over time, as we just discussed. Also, consider different types of inflation resistant fixed income investments, such as high yielding bonds. So you may also want to reduce exposure to investments that are more sensitive to inflation. So we've just touched on that. Alec: [00:20:49] Yeah, yeah. This next one, I think, is probably the one of the most important ones and definitely one that how I'm living my investing life, which I've labelled. Don't just age. Invest your age. This is from the head of personal finance at Morningstar. Over in the US, she talks about when you're under 50, the bulk of your retirement portfolio should be in stocks because the S&P 500, so America's major stock market index has averaged 9.5 percent over the last 20 years. That basically stocks regardless of how inflation, what is going on with inflation. Stocks have been the best investment over the past 20 years, and you shouldn't panic too much if you're young and you should just stay the course. Keep investing for the long term because inflation will go up and it will go down, but the economy will get more productive. Great companies will continue doing great things. That's probably if there's one takeaway from this episode is that, yeah, it's that I might not look it, but I still am young and I still got time on my side Bryce: [00:21:56] plenty of time. If you're older, make sure that your fixed income products are inflation protected is the flip side of the coin. Hmm. Alec: [00:22:07] So yeah, you've got to move as you get older, you got to move to assets that pay you income under a bit more safer and defensive, but you don't want to. You don't want inflation to really take a chunk out of what you've saved for decades and what you've the nest egg that you've grown so. Speak to your financial advisor about what inflation protected assets will pay you in income. Bryce doesn't want to get too deep down that rabbit hole, so I won't say anything more. Bryce: [00:22:34] Nice. So, number five, if you're going to invest in rates, real estate investment trusts, inflation shouldn't be your only concern. The reason for this real estate traditionally does well during periods of higher inflation, which we spoke about is the value of property can increase. However, there are other considerations, especially post-COVID. Commercial real estate like office space and retail still have question marks. So rates are usually not just exposed to residential property. In fact, very few are. There's a lot of them that still have exposure or that are exposed to commercial real estate. Alec: [00:23:15] Yes, real estate does well during inflation, but you still got to analyse that as an investment. Yeah, the next one? Diversification. Inflation is just one more reason why it's important to have a well diversified portfolio. If your investments are spread across different asset classes, geographies and industries, it can help protect you from risk. That's from a lot of Benson, an investing expert at NerdWallet. I have no idea what NerdWallet do, but I think that that's a really important point to stress. And if you think about at the start of this episode, we spoke about how inflation was seven percent in the U.S. and 3.5 percent in Australia. That geographic diversification is important. Bryce: [00:23:58] Number seven is to consider value stocks in the consumer staples space, consumer staples being essentially supermarkets and all of those things that we need to buy to essentially stay alive. The reason being that as stocks generally hold up better during times of inflation, as we've as we've spoken about the reason consumer staples. Is a good space, food energy is because that during inflation, despite prices going up, we still need to buy these products that's called inelastic, so we still need to go to the supermarket and buy products to stay alive and eat. And as such, supermarkets can have more pricing power and pass on those prices. Alec: [00:24:38] Final one from a personal finance expert look to high quality companies that pay dividends. And I think that's just an important reminder that however inflationary the environment is, however sensationalist the headlines are, those really great companies will be continue to be great regardless of what the moment is. And in the last 20 years, the really high quality companies that we all can think of the Microsofts, the Googles, they've survived wars, they've survived the housing crisis, they've survived multiple market crashes, they've survived Covid. They'll survive inflation as well. They'll survive interest rates rising if they rise in the coming months. Quality is what matters as investors, and I think that's an important reminder. Bryce: [00:25:29] That's it. So Ren you you left us with a cliff-hanger at the top that you had the worst advice that you read. Let's close out Alec: [00:25:36] one personal finance expert. I'm going to say that should be in inverted commas on, say, in a CNBC article said cash was a good inflation hedge that keeping your money in cash. Bryce: [00:25:51] I just don't understand which is the Alec: [00:25:52] whole reason that we worry about inflation because cash gets worth less silly. Bryce: [00:25:57] Very silly. How that got editorial? Yeah. Anyway, that's just a incredibly dumb. In that end. Do not do that. Alec: [00:26:04] No personal advice. Bryce: [00:26:06] But cash getting is not king or queen. Alec: [00:26:09] You need to have assets that keep up with inflation, and cash does not keep up with inflation. I want to close it out with this question for you. Yeah. With all these headlines about inflation chat about inflation in the Equity Mates Facebook group, are you doing anything different as an investor? Bryce: [00:26:26] What I'm not doing is going in there and selling positions and changing portfolio composition based on all of the sort of scary headlines that are coming out. Happy with the companies I'm invested in. I'm happy with the portfolio that I've got. Yes, I'm taking a hit at the moment, as are a lot of people. But given my age, I think, you know, we've got an incredible time horizon in front of us. What I am doing is taking a bit of a back seat when it comes to investing in the market. I'm not being as active as I have been over the last few few months, few years. And that's because in times like this, I'm I'm just going to have a bit more cash on the side, which I know is not. That's not what we said, but there's a reason for that. And that's because I want to be able to take advantage of some of the buying opportunities that are going to present themselves. I'm not hoarding cash for the sake of it being secure, if that makes sense. Okay, I know that's a bit contradictory, but I have intentions to put it in the market. Alec: [00:27:26] Yeah, you're holding cash because you think the stock market will go lower and you want to wait for the right buying opportunity. Bryce: [00:27:33] Yeah, not because I'm hoarding cash as a secure investment opportunity on its own. Alec: [00:27:39] Yeah, yeah. What about you? Yeah, I'm the same. I have had some gold in my portfolio for a while. I remember one of our live shows. People laughed at me for having gold in the portfolio. Yeah, you laughed at me, I'm pretty sure. And then afterwards, someone, everyone on the panel didn't have any gold except for me. And then someone in the crowd came up afterwards and was like, I have some gold in my portfolios, and I was like, respect. But anyway, so I've got some gold. I have some real estate investment trusts and then I've got a number of ETFs and companies and stuff like that. But for me, I'm just going to keep dollar cost averaging and I'm not going to add any more gold or anything like that. I've got some crypto, but that's just I don't even think about that in the same way some people think of crypto as an inflation hedge. I think of crypto as a pun unknown, known as a as a gamble know for me, just keep getting more and more money into the stock market and Bryce: [00:28:40] let it ride for more of a Deep Dive on inflation. The guys over at Comedian v economist have been unpacking it. So check out that's another podcast in the Equity Mates. Maybe a stable, but otherwise Ren. It's been great to chat as always, and we'll pick it up again next week. Alec: [00:28:55] Sounds good.