Dave Gilbert here, Editor of Smart Money.
Unless you ignored the news today (which may not be a bad idea), you undoubtedly saw that consumer prices jumped to their highest reading since Ronald Reagan’s first year in the White House more than 40 years ago.
And knowing how worried investors have been about inflation, you would think they surely dumped stocks as a result.
Well… not exactly.
They bought stocks, and they bought fairly robustly. On the New York Stock Exchange, the number of advancing stocks outpaced declining stocks by more than 5X at the time of this writing.
They saw some good news in there, if you can call it that. The “core” inflation rate, which excludes volatile food and energy prices, increased less than expected (0.3%). But with core prices still high at 6.5%, which, again, is the highest since 1981, it may be too early to pop the cork.
Nonetheless, some investors took the “it’s not as bad as expected” news as a sign that inflation may be topping out.
Are they right? And if so, should it change your strategy?
The “Revenge” of Caution
It is risky to take a single inflation reading and assume that the worst is over. And with so much uncertainty in the world right now, trying to predict the future is riskier than usual.
Guessing wrong on inflation can be costly. Eric has written to you recently about how inflation is a financial toxin, the stock market’s kryptonite.
So rather than throw caution to the wind, even if you can squint and see a tiny little hint of good news in the latest report, Eric recommends embracing caution as a standard investing strategy. “The revenge of caution” is one of the 2022 trends he identified in January, and he’s certainly been spot-on through the first quarter.
But caution sounds boring, right? Depends on how you look at it. Last fall, Eric wrote to his Fry’s Investment Report readers about the “thrill” of caution:
No guy ever rushed into a bar to wow his buddies with “crazy” stories about extreme acts of risk-avoidance.
No one ever boasted, “Hey guys! Did I ever tell you about the time I refused to ride a motorcycle?… or what about that time I boosted the coverage on my pet insurance?… pretty crazy, right!”
Caution is boring. But ironically, it is often the prerequisite to thrills and excitement. Without cautiously packing a parachute, for example, no one ever seizes the thrill of jumping from an airplane (and surviving).
And without cautiously squirreling away cash from time to time, no one ever captures the excitement of investing in a high-flying stock.
In this month’s issue, we’ll examine a few aspects of caution that contribute to the thrill of successful investing.
It’s not as boring as it sounds!
Caution involves good, old-fashioned common sense, like…
- Keeping cash on hand as both a hedge against downturns and to take advantage of stocks selling at a discount.
- Diversifying your holdings across asset classes. I like how Eric refers to diversification as “… a surrender to the unknown. We diversify our portfolios because we cannot know exactly what the future holds.”
- Allocating your portfolio intelligently. This is a sub-section of diversification, but it is also the ability to recognize your unique financial situation; if you need assets to live on or will need them for something in the near future, it is obviously better to take on less risk (if any) with that money.
- And considering a hedge (or two, or three…). Hedging means having at least some of your money in assets that zig when stocks zag. It can also mean simultaneously betting on both rising stocks and falling stocks.
As a former hedge fund manager, Eric knows the art and science of hedging as well as anybody. It can get complicated, but if you want some quick ideas to consider as inflation hedges, here are three Eric has talked about…
Eric calls gold the “old faithful” of inflation hedges. It does not always provide minute-by-minute protection against inflation, but it tends to provide fairly reliable protection over time.
Gold tends to remain placid during periods of relatively low inflation. But once the inflation rate kicks into high gear, so does gold. That has been the case for the past six months as gold (as measured by SPDR Gold Shares (GLD)) has easily outperformed the stock market.
Commodity stocks in general are often good inflation hedges, and we now have both inflation as well as a lopsided supply and demand imbalances in several commodity markets.
Here again, Eric identified a coming boom in oil, even before inflation surged and Russia invaded Ukraine – putting more upward pressure on oil prices. Oil has surged this year as stocks have struggled.
Rising interest rates and rising prices tend to go hand in hand. This trend is harmful to most investments. But there are ways to “invest” in rising interest rates, and one is to effectively short bonds.
As you may know, bond prices and interest rates have an inverse relationship. As interest rates go up, existing bonds with lower yields are less valuable, so the price of the bond itself drops. That’s why shorting bonds can be a good hedge.
This hedge is also sticking to the script so far in 2022, as measured by the ProShares Short 20+ Treasury ETF (TBF).
Eric has recommendations for all of these inflation hedges in his Investment Report and Speculator services. Although “indirect hedges” like these do not automatically rise when the overall market is falling, we’ve seen so far this year that they can deliver big gains amid market turmoil.
And incorporating some caution into your investment strategy is just plain smart in both boom-and-bust times.