This asset allocation plan will help you fight inflation

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We live in a “new reality of money”…

Yesterday the news broke that inflation had risen 9.1% over the past 12 months in the United States.

This is the largest increase in the cost of living since November 1981.

President Biden…Treasury Secretary Janet Yellen…and Fed Chief Jerome Powell claimed inflation was “passing.” But this news makes those claims laughable.

More importantly, it’s a disaster for your savings.

At this rate, the dollars you stuff under your mattress will lose half their purchasing power in just under eight years.

It is also a headwind for equities and bonds. Since the beginning of the year, they are both down more than 10%.

As a colleague and former hedge fund manager, Teeka Tiwari warned his readers…

We are in what I call a new money reality. Obscene money printing and uncontrollable inflation have perverted the normal rules of money.

It is therefore essential that you do not slavishly follow the traditional 60/40 portfolio split between stocks and bonds.

Instead, Teeka recommends taking inspiration from the ultra-rich.

This means moving some of your capital into non-traditional assets that have a track record of growing wealth, even as inflation rages.

We already know that bonds get hammered when inflation soars…

We examined it in detail in yesterday’s dispatch. In short, bond prices fall as inflation rises.

Equities may not be enough to keep you ahead of inflation either…

This is the warning Teeka had for Letter from Palm Beach readers in this month’s issue.

If you’re a paying subscriber, you can catch up in full here. And if you’re not yet a Teeka reader, don’t worry.

It’s all in this next table…

You look at the 20-year returns of different investments such as the S&P 500, gold, and bonds (blue bars) alongside the returns of the average self-directed investor (red bar).

As you can see, investing in the S&P 500 would have earned you an average of 9.5% annualized per year. This is enough to keep up with the current inflation rate of 9.1%.

But the average investor got a paltry average annualized return of 3.6%.

This is due to common mistakes investors make, such as trying to time the market by buying and exiting stocks.

In addition, high inflation hurts stock market valuations…

This is because it weighs on profits.

Business costs are rising. This compresses the margins. Inflation also erodes the value of the dollars businesses earn.

So when inflation is running high, investors reprice their stocks lower.

You can see what I mean in another graphic that Teeka shared with our Letter from Palm Beach people.

It shows the rate of inflation (orange line) plotted against the price/earnings (P/E) ratio for the S&P 500 (blue line). The P/E ratio measures how much investors are willing to pay for every dollar of profit.

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You can see that when inflation increases, the P/E ratio decreases. This drives down stock prices.

So if you currently only have stocks and bonds in your portfolio – as the traditional 60/40 model dictates – you’re in trouble.

This is why Teeka has revised its recommended asset allocation model…

There’s nothing you can do to stop the government printing money…fix the strained supply chains…or end Russia’s war on Ukraine.

But you can act to protect yourself against the inflation they cause.

Teeka says your wallet should reflect the new money reality we’re facing.

This is the plan that Teeka unveiled last week in The Palm Beach Letter:

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Here’s Teeka on how it fits together…

The first category is stocks (aka stocks). This remains the largest part of our portfolio, at 50%. Owning the right stocks over the long term offers great growth over time compared to most asset classes. You should focus on blue chip stocks with above average dividend yields and growth stocks with high upside potential.

Second, fixed income securities represent 20% of the portfolio. Bonds have just had their worst start to the year since the Civil War. In a market where a 2% to 3% drop in six months is big news, the U.S. bond market is down more than 10% so far in 2022. So, in addition to special high-yield bonds, look for investments that beat inflation. non-bond returns. These include real estate.

The remaining 30% are in the alternatives. This includes asymmetric investments such as cryptos and private stocks. These have huge upside potential. So you don’t need to invest large sums to have the chance to earn lives. Alternatives also include safe financial havens, such as collectibles, precious metals, and other “durable assets” that can outperform inflation.

The ultra-rich love alternatives right now…

A study by Ernst & Young last year found that 8 out of 10 ultra-high net worth people invest in alternatives. And Teeka noticed that this includes many wealthy people in his own network.

For example, he was at the Miami Grand Prix in May. There, he asked wealthy contacts what they were investing in amid the current market turmoil.

The answer was not stocks and bonds. It was collectible Ferraris…luxury watches…prime art…and hot real estate markets in Los Angeles, New York and the Hamptons.

These alternative assets are in high demand. At the same time, they are rare. This makes them excellent inflation beaters.

Contemporary art, for example, has generated average annual returns of over 14% over the past 26 years. Even with today’s inflation rate, you would come out a winner.

These are assets that anyone can buy…

They are not reserved for the ultra-rich.

Teeka and his team researched ways to partially own classic cars and top notch artwork.

With fractional investing, the owner of an asset can list that asset on a platform and offer shares (or fractions of the asset’s value) to investors.

For example, you can list a rare $100,000 baseball card on some platforms and offer investors fractions of it at $100. If the value of the card is $1 million, a fraction of $100 will increase to $1,000.

This is now available for everything from supercars to luxury real estate.

One platform recommended by Teeka is Masterworks.

It lets you get fractional ownership of some of the world’s most sought-after paintings for as little as $20.

It’s a great first step to adding anti-inflation alternatives to your portfolio.

And as we continue to grapple with this new money reality, I’ll have more alternative investment recommendations for you in future dispatches. Stay tuned…

Until tomorrow,

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Chris Lowe
July 14, 2022

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