Understanding Inflation is the Key to Creating Wealth

Understanding Inflation is the Key to Creating Wealth

Inflation has been with us so long that it rarely generates serious press any more. Everyone just assumes it’s always been here and it always will be. Nothing we can do to change it. Keep a stiff upper lip and forge onward. But to the young investor willing to buck conventional Wall Street wisdom, constructing an inflation-friendly portfolio could hold the key to your financial future.

Before we move on to talk about the single asset class that actually works better in the presence of inflation, let’s illustrate how inflation kills your stock investing. In the world of Wall Street, a portfolio that generates a 10% return is doing okay. We’d agree – a 10% return is just that – okay. Not bad but not great either. The problem is that you have to subtract the annual inflation rate from that number because the buying power of everything you own is reduced accordingly.

The government reports inflation at about 3-4%. Just like that your ROI is slashed to around 6%. It’s still better than a cd or money market account but not looking quite so glamorous. The problem is that the government inflation rate is wrong. It’s understated by a considerable amount. Our calculations, as well as other national economic thought leader organizations like the National Inflation Association, place the real inflation rate at closer to 10%.

Oops. Just like that your Wall Street generated “profit” has been neutralized at best or reduced to only a point of two at worst. The problem is that stocks and bonds are denominated in terms of currency, and inflation constantly devalues currency and purchasing power. What you have to do is find an asset that isn’t directly tied to money. Luckily, just such an asset exists. We call it income property investing, which, perhaps obviously, is a specialized approach to buying real estate.

The entire strategy goes beyond the means of this article but the broad idea is to assume long-term, fixed-rate mortgages

tied to a piece of income producing property. How does it produce that income? Rent it out! Your tenant’s payment should cover the mortgage, other expenses, and still leave you with a positive cash flow.
And at the end of it the mortgage, you own an asset that someone else has paid for. It doesn’t get any better than that (Top image: Flickr | 401(k) 2012).

The Young Wealth Team