If rampant inflation for the past year has told us anything, its that consumers are flush with cash and ready to spend like it’s 1999!
Even though I was born in the dot-com era of 2000, I’m sure it was as wild especially since Black Friday, lockdowns, and online shopping weren’t around back then.
The good old times when “buy now, pay later” didn’t make Millennials broke.
As we head into the new year, plummeting national savings rates mixed with recessionary fears are worrisome, so investors’ best plans are to stay the course through dollar-cost-averaging, buying the dip, and securing inflationary-proof investments that rally when our purchasing power in our wallet is fading.
When investment yields are higher, risk-asset prices are lower and in response, sell-off, especially during times of higher borrowing costs as future expected earnings are dimmed. As corporate earnings results for Q4 roll around the corner before we know it in 2023, so will deflation, eventually.
It will definitely take time for the Fed to reach its target of 2% so in the meantime, let’s take advantage of rising rents, discounted home prices, equities, and alternatives in the private markets since they won’t be trading at these bargain-basement deals forever.
The Most Advantageous Inflationary-Proof Investment : Real Estate
Although its hard to compare risk assets to real estate since more return = more risk, in fact, I’ll argue that real estate not only offers less risk but more return as a result.
In order to reduce your tax liability for the year, owning any sort of business, from a blog to rental property is most advantageous to minimize your tax liability, maximize business expense deductions, and of course, win when all of our cash is losing due to the Fed’s aggressive hikes.
Since real estate is a lagging not leading indicator in the markets since it takes time to adjust unlike equities that can tank on bad news overnight. This year alone it took a good 3–5 months once the Fed first hiked in March for home prices to finally feel the effects in the fall. If you search hard enough, you’ll find juicy deals for real estate bargains.
As mortgage rates rise, this leads to a natural correction in home prices as demand has eased, leading to further deals for future homeowners and property hunters alike! My cap is managing 4 rental properties since past that point, dealing with renters is the same as operating a 24/7 gas station. It takes massive work, patience, and hard to sleep soundly at night!
Although demand has naturally cooled and only rambunctious sellers cross their fingers and list their property at this time of the year when it’s too chilly and dark for open houses, rising rents are still real, especially across coastal cities and the heartland where WFH is fierce.
Inflation is an excuse for rent to rise, but don’t raise it too high at the expense of losing trusted renters since that’s never a good compromise. Since you’re in control of pricing, make sure to be responsible too. Inflation not only increases rents to cover rising prices across the board from staple to serviced goods but increases the utility factor of a home since it tends to be utilized more.
As a physical tangible asset, unlike real estate crowdfunding where you gain exposure to real estate across the nation without managing or visiting the actual properties themselves, with a real property, you have much more ownership and freedom over who gets to occupy the home, what you charge, and in exchange, what you net each month.
Although when looking at the larger picture, investments from equities to real estate more or less correlate in some shape or form, real estate is by far the most prudent, reliable, and less volatile of them all. If you’re interested in diversifying further, artwork, collectibles, natural resources, and farmland are all the rage nowadays to diversify and non-correlate away as much as possible.
Runner-up Investment: U.S. Treasuries
Since bonds are having one of their worst years in over 40 yrs, this means we actually get more bang for our buck in terms of time and effort.
Since risk-less assets such as Treasuries which are backed by the U.S. gov’t have never defaulted, Treasuries are a guaranteed way to lock in an attractive 4%+ nowadays without needing to time or track the market.
Locking in a rate above 3.5% doesn’t come around often since historically a yield inversion curve only proceeds a recession every 8–10 years as we’re most likely headed into one next year.
With short-term bills and notes that mature under a few years yielding 4.5 almost 5%, this is certainly a better bargain than risk-less assets that may go nowhere in 2023. But remember, the longer term is a different story so make sure to diversify! As borrowing costs climb, so do investors’ cash into short-term safe havens such as treasuries, valuing them higher than Big Tech.
In sum, no matter where inflation lands in 2023 due to the Fed’s possible induced recession, we must realize that there’s no safer feeling than owning something in your name and investing in trusted U.S. gov’t securities. Once the mortgage is paid off, no institution can take it away from you and you have real pricing power then.
If there’s one thing for sure since the Great Financial Crisis will not repeat again with more stringent measures in place such as the FTC, FDIC insurance, and required reserves, real estate’s pricing power nor treasuries will not tank overnight so you can sleep soundly knowing you have more than you believe in your control!