How to Avoid Investment Losses if Inflation Picks Up
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What is the main topic discussed in this episode?
Here's your money briefing for Friday, October 2nd. I'm Charlie Turner for The Wall Street Journal.
Why should investors start worrying about inflation now?
Inflation hasn't been a big concern for most investors in a long time, but it might be wise for anyone with an investment portfolio to start thinking about it now.
The Fed has basically come out and said that they will tolerate higher inflation. This is something that they typically don't do. They said that they will let inflation run hot for a while before tightening up. If you let something run hot, sometimes it turns into a blaze and burns you. And inflation is notoriously difficult to control once it gets going.
Our Heard on the Street editor Spencer Jacob will be here in a moment. He'll talk about the effect of inflation on various types of investments and where investors might think about parking their money as a hedge against it.
How has the Federal Reserve's new tolerance for inflation changed the risk outlook?
That's after the break.
Most investors have spent more than a little time lately worrying about volatility during the pandemic and whether their taxes might go up depending on who wins next month's presidential election.
What macro forces could trigger a sustained rise in inflation?
But one thing that probably hasn't been on most investors' radar is inflation. Some observers think that's a mistake. Joining us with some insights as to why inflation should be more on people's minds is our Heard on the Street editor, Spencer Jacob. Spencer, thanks for joining us. Thanks for having me. Spencer, most people on Wall Street and Main Street don't express any concerns about rising inflation. It's been low for years, and the Federal Reserve isn't planning any interest rate hikes for the foreseeable future. But you write that some smart investors remain wary. Why is that?
They do. And the main reason that they do is that we have seen unprecedented stimulus from the federal government and from the Fed in terms of a record budget deficit and rates being pushed very low and record levels of bond buying. Now, Finance 101 or Economics 101 tells you that those things, combined with trade frictions, which we've also seen lately, all contribute to higher prices. And the fact that we have not seen them and haven't seen them since the financial crisis and back then in the years after the crisis, many people got egg on their faces predicting that we would have higher inflation doesn't mean that we won't in the future. And you do have some smart people out there saying that we had better watch out.
The ingredients are all there and the ingredients are unpredictable. And the main reason right now, aside from all that stimulus to be concerned, is that the Fed has basically come out and said that they will tolerate higher inflation. This is something that they typically don't do. They said that they will let inflation run hot for a while before tightening up. If you let something run hot, sometimes it turns into a blaze and burns you. And inflation is notoriously difficult to control once it gets going.
Okay, so let's talk about what kind of impact inflation can have on a typical investment portfolio. Let's start with bonds. What could investors expect there if inflation starts to go up?
Well, most investors have at least part of their allocation to bonds, whether it's longer-term or shorter-term bonds, corporate bonds or treasuries. A typical conservative portfolio has some money in them. But right now, the 10-year Treasury note is already an invitation to lose money. You're getting 0.6% roughly. The rate of inflation is about a percentage point higher than that. So even before you pay taxes, even before anything, you're losing money on those ultra-safe investments. If you were to have, from that low starting point, a substantial uptick in inflation, say between 3% and 5%, I'm not talking about hyperinflation, then any bond fund that you own would immediately lose value, lose a substantial part of its value.
How would rising inflation affect bond investors and Treasury returns?
Even if you have tips, which are treasury inflation protected securities, that's something we didn't have in the 70s to protect our portfolios.
I assume we're talking about domestic bonds.
What about overseas bond investments?
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:06–0:11
2
Why should investors start worrying about inflation now?
0:11–0:50
3
How has the Federal Reserve's new tolerance for inflation changed the risk outlook?
0:50–1:09
4
What macro forces could trigger a sustained rise in inflation?
1:09–3:48
5
How would rising inflation affect bond investors and Treasury returns?
3:48–4:37
6
Could overseas bonds or currency moves be a safer inflation hedge?
4:37–6:01
7
Which types of stocks historically perform well or poorly during high inflation?
6:01–9:37
8
How do sectors like retail, tech, health care, real estate and financials react to inflation?
9:37–12:40
Speakers
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