How to Combat Inflation

Let’s continue our discussion on building an all-weather portfolio this week. As a reminder, the seven areas that I think are worth considering today are:

If we allocate a little capital to each of these areas every time we get paid, we’ll have an automated system for building wealth. Consistency is the name of the game.

You can find our coverage of Bitcoin, gold, world-class insurance, top-tier energy, and gold royalty stocks at the links above. Today let’s talk about consumer inflation hedges.

For the last two generations, the success plan was clear.

Go to school –> get good grades –> go to college –> get a good job. If one followed that plan and had a good work ethic, a successful middle-class life would come easy.

And for those more ambitious, there were very few roadblocks to starting a business. Opportunity was everywhere.

That was the American dream. It’s what inspired countless hard-working immigrants to create a new life in this country in the 19th and 20th centuries.

But that dream is fading.

The traditional success plan – go to school, get good grades, get a job – it no longer guarantees success. Colleges today load students up with debt. Some also push destructive ideologies.

Meanwhile, the Administrative State peppers small businesses with all kinds of regulatory burdens. That makes starting and growing a traditional business difficult.

And to top it off, reckless government spending has driven up everybody’s cost of living. They financed this spending with printed money. And that created consumer price inflation.

The impact inflation is having upon us is clear. I see it when our grocery bill comes due each week. And I can’t take my family of four out to a nice dinner any more for less than $100.

I also see inflation’s insidious effects inside my investment real estate portfolio.

I have several properties where the rent came in on time every month like clockwork for years. Until recently.

Now the rent comes in several weeks late most of the time. We even had to lower the rent for one of our properties so a good tenant could renew the lease for another 12 months.

It’s all because many households find themselves running month to month thanks to inflation. Their income hasn’t kept up with rising costs of living.

It’s clear. Inflation is destroying the average family’s disposable income.

This doesn’t bode well for companies selling higher-end goods. Luxury cruises… high-end cars… overpriced fashion brands – these businesses and many like them are going to struggle in the years to come.

At the same time, there are certain goods the American consumer will always buy – regardless of how tight the monthly budget is.

For example, people will still go to the supermarket regularly. They’ll buy their food, soda, snacks, candy, personal care products, and household cleaners… just like they always have.

Many families will still go out to eat as well. The convenience is hard to beat.

Except instead of going to a nice restaurant, many will choose fast food because it’s cheaper. There’s a reason why certain fast food chains are among the world’s best businesses.

And I don’t think we will kick our addiction to coffee and sweet drinks any time soon. So Starbucks and similar companies are likely to remain popular in the years to come as well.

And what about discount stores like Walmart and Dollar General?

They will continue to offer consumers every-day goods at low prices. These “lower end” stores will likely gain new customers as inflation wreaks havoc on disposable income.

The point is, the American consumer isn’t going away. But his spending habits are likely to shift to lower-price alternatives.

There are some publicly-traded companies that will benefit from this shift in consumer spending. Their stocks can serve as inflation hedges for us.

And here’s the thing – some of these companies are fantastic businesses. They are capital-efficient and shareholder friendly. That’s exactly what we’re looking for in a great investment.

The key is that we must buy these companies when they trade at a reasonable valuation. That’s true of all investments.

If we’re patient enough, we can add these inflation hedges to our portfolio at a great price. Then we can reinvest the dividends to compound our investment for years to come.

-Joe Withrow

P.S. For a deeper dive into what’s happening with the economy – and how to bulletproof our finances accordingly – please see my book Beyond the Nest Egg.

It’s available on Amazon right here: https://www.amazon.com/Beyond-Nest-Egg-Financially-Independent-ebook/dp/B0CG7VYRV7/