Interest Rates, Inflation, and Opportunity
Investors and Colleagues,
One of today’s most important financial debates revolves around interest rates. Ever since the beginning of the financial crisis, the Fed has kept interest rates artificially low.
The purpose of low rates is to create an incentive for investors to allocate capital for growth. The fed knows that if investors keep their money parked in “safe” deposit-based accounts, that capital will not be efficiently used to generate economic growth.
In a healthier environment, this capital would be used to invest in businesses, which in turn creates jobs and leads to widespread prosperity. The Fed has kept rates at historical lows for the last two years, attempting to manipulate markets and stimulate growth.
While low rates may help to funnel capital into productive areas of the economy, they can create some nasty side effects as well. Low interest rates are typically associated with “cheap money” – and with so much capital available at low costs to investors, inflation becomes a major risk.
High inflation can hurt a wide range of the population. Retirees are typically the hardest hit, because high inflation means that the value of their savings quickly erodes. If the cost of living increases by 30%, while a nest egg only increases by 5% or 10%, then the TRUE value of a retirement account actually drops.
For younger workers, the effects of inflation can still be very damaging. Higher costs of gasoline, food, and electricity can create personal budget issues. Unless your income rises fast enough to keep up with inflation, you will find yourself with less and less spending money over the next few years.
As I look at my own personal finances, my primary goal is to grow my income and my investment capital at a higher rate than future inflation – so that my money is actually working for ME rather than the other way around.
WHEN IS INFLATION A GOOD THING?
Anytime there is a significant shift in financial markets, there are people who are hurt by the new environment, and those that take advantage of new opportunities. I want both of us to be included in the second category.
When inflation begins to increase, the majority of people find that their income just doesn’t stretch as far as it used to. But there are a few that actually profit from this trend, and use the new dynamics to grow their wealth.
Inflation has the effect of increasing prices for “tangible assets.” Typically, these are things that you can see, and feel. Real estate fits nicely into this category, because inflation typically boosts the price of land, similar to the increases we have already begun seeing for energy and agricultural commodities.
If you are serious about protecting your family’s wealth, or the wealth of your investment clients, then you should have a well defined strategy in place for fighting inflation.
Just like any professional stock investment program, an inflation-fighting strategy should be well diversified. Typically, institutional investors recommend investments in precious metals, energy assets, and agricultural commodities as an effective portfolio against inflation. This may be a good strategy, but the truth is that all of these asset classes have already experienced the majority of their gains.
The one inflation-fighting asset class that still appears to have significant gains ahead is the real estate market. A high inventory of residential property has held prices down for the last two years. But we are already seeing significant appreciation in the very best real estate locations. Ashford Capital has been capitalizing on niche opportunities in the Atlanta market for years, and we’re still seeing tremendous deals even as inflation begins to affect the real estate market.
History has been kind to investors who have to foresight to take advantage of major shifts in the economic environment. Don’t let the inflationary environment take its toll on your net worth. Please give me a call this week so we can discuss opportunities for you to use this period to your advantage.
There is no time to take action like the present. I look forward to our conversation, and to serving you as we protect your wealth and pursue strong inflation-adjusted returns.
Wishing you every success,
Matt