Intro: Why Your Wealth is Decreasing (And How You Can Solve It)
You put in the effort to earn money, don’t you? Inflation, however, behaves as a **hidden burglar**, constantly eroding your spending value every year. Your £100 now only has the same value as £85 five years ago.
The best part is that you can **turn the odds in your favor** by devising a plan to ensure your portfolio is able to **withstand inflation pressures**. In this guide, you will learn:
– **Three assets that are *counter-cyclical* to inflation** (cash is not one of them).
– **The impact of the Fed rate hike** on your investment and how you can address it.
– How to preserve your wealth easily, regardless if you have £1,000 or £1M.
Let us get started before inflation consumes every reserve of your savings.
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## **Part 1: The Devastating Effects of Inflation on Wealth (The Scary Maths)**
### **1.1 The Rule of 72: The Rate of Price Inflation Over Time**
Divide **72 by the inflation rate to get the years until prices double.
– At **6% inflation, prices double every **12 years**.
– At **9% inflation, prices double every 8 years.
**Example:**
– The price of a car will be £100,000 in 12 years with 6% inflation.
– At 9% inflation, a £1 million retirement fund will only retain half its purchasing power after 8 years.
### **1.2 Why Savings Account Is Not Beneficial**
– Real (inflation-adjusted) loss from interest: £0.01 vs. 6% gives a -5.99% annual loss.
– Savings of £10,000 get devalued to £9,400 after a year.
**Takeaway:** If your money is not growing, at the very least, keeping up with inflation, then you are losing money.
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**Part 2: 3 Inflation-Proof Investments (that have stood the test of time)**
### **2.1 TIPS (Treasury Inflation-Protected Securities)**
– Definition: Contemporary government debt that comes with built-in inflation protection.
– Process:
– Based on the Consumer Price Index (CPI), the principal gets adjusted.
– Interest payment every 6 months.
– Target audience: Conservative investors (retired individuals, emergency funds).
**Illustration:**
– Purchase of £10,000 in TIPS.
– After a year, inflation jumps by 5%.
– The bond, along with interest, stands at £10,500.
**Purchase method:**
– Via TreasuryDirect.gov.
– Through ETFs such as SCHP or TIP.
### **2.2 Real Assets: Tangible Assets That Actually Hold Value**
#### A) Real Estate
– Property and rental value increase alongside inflation, leading to higher profits for landlords over time.
– REITs allow people to make real estate investments without actually having to purchase or deal with management of the properties.
**Best REITs:**
– VNQ, other more commonly known as “Vanguard Real Estate ETF.”
– O or Realty Income, known for their monthly dividends.
#### B) Commodities (gold, oil, agriculture):
– Gold continues to be considered one of the best investments to keep value during inflation.
– **Oil/Energy Stocks** = Gain from increases in fuel prices (e.g., **XLE ETF**).
– **Farmland** = Possible via **FarmTogether** and **REITs such as FPI**.
### **2.3 Stocks That Beat Inflation**
Not all stocks deal with inflation the same way. **Concentrate on:**
– **Pricing Power Companies** (Can raise prices easily):
– **Apple (AAPL)** – Gains due to strong brand loyalty.
– **Costco (COST)** – Membership-driven model safeguards profit margins.
– **Floating-Rate Businesses** (earnings increase with rates):
– **Banks (JPM, BAC)—Their income grows with increased interest rates.
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### Part 3: Fed Rate Hikes – Threat or Opportunity?
### 3.1 How Rate Hikes Affect Your Portfolio
– **Stocks:** Temporary discomfort (acute with growth stocks) but reliable in the long run.
– **Bonds:** Prices decline when rates go up (unfavorable for conventional bonds).
– **Cash:** At last earns interest (high yield savings are now at **4-5%**).
### 3.2 What to Do When Rates Rise
– **Move from long-term bonds to short-term bonds/TIPS.**
– **Accumulate undervalued stocks** (note that technology stocks drop during hikes).
– **Secure high CD rates** (min. 5% for 1-5 years).
Note: The **two-year Treasury** frequently offers a yield higher than **inflation** during interest rate hikes.
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## Part 4: Three Simple Inflation-Proof Portfolios
### 4.1 Conservative Plan (Low Risk)
– **40 percent TIPS** (inflation-protected guaranteed safety).
– **SCHD ETF** (growing income) contributes **30%** of the portfolio.
– Contributes **20%** of the portfolio to hedge crises with **GLD ETF** (Gold).
– Contributes **10%** of the portfolio to cash (for emergencies).
### **4.2 The Balanced Plan (Moderate Growth + Protection)**
– Splits **30%** of the portfolio to **S&P 500** (VOO ETF) since stocks outpace inflation in the long run.
– Contributes **25%** of the portfolio to Rent Real Estate (VNQ ETF) as rents rise with prices.
– Contributes **20%** of the portfolio to TIPS (Treasury Inflation Protected Securities) to insure against inflation.
– **15%** allocated to DBC (Commodity ETF), which includes oil and metals.
– Allocates **10%** of the portfolio to FLOT (Floating-Rate Bonds ETF), which thrives in rate hikes.
### **4.3 The Aggressive Plan (Max Growth)**
Allocates **50%** of the portfolio to stocks (VTI ETF + sector ETFs like XLE and XLF).
Allocates **20%** in commodities to crypto (Bitcoin serves as an inflation hedge due to limited supply).
Sets aside **15%** for rental properties for cash flow alongside appreciation.
Allocates **10%** to commodities.
Keeps **5%** in cash.
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## **Part 5: Common Mistakes to Avoid**
### **5.1 Hoarding Cash Long-Term**
**Problem:** Cash loses value every year due to inflation.
**Fix:** Park only **3-6 months’ expenses** in high-yield savings.
### **5.2 Ignoring Taxes**
– TIPS interest does incur taxes (even if it’s not yet paid out).
**Solution:** Hold TIPS in a Roth IRA for tax-free growth.
### **5.3 Panic Selling During Volatility**
– Turbulent Market = Inflationary periods.
**Best Move:** Stay diversified and rebalance annually.
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## **Part 6: Getting Started Today With as Little as £100**
### **6.1 Step 1: Create a Brokerage Account**
– Opening a brokerage account can be done through **Fidelity** or **Vanguard** (best for ETFs).
– **Robinhood** is the easiest option for beginners.
### **6.2 Step 2: Select 1-2 ETFs That Protect Against Inflation**
– **SCHP** (TIPS) + **VOO** (Stocks) is a good start.
– Investing **£100 a month** could lead to more than **£50,000** in 20 years.
### **6.3 Step 3: Automate And Forget**
Set up auto-investing and check just once a year.
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## **Conclusion: Taking Action Now is the Best Way to Beat Inflation**
Inflation is here to stay, but investing in **TIPS, real assets, and smart stocks can allow you to not** only **survive but thrive.**
**🚀 Your Next Steps:**
1. Shift your cash to a **high-yield savings account** earning 4-5% APY.
2. Purchase your first ETF that protects against inflation, like SCHP or VNQ.
3. Invest in 1 or 2 real assets like gold, REITs, or energy stocks for diversification.
**Note:** The greatest opportunity to inflation-proof your portfolio was yesterday. Today is second best.
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**Why This Works:**
✔ This is free of jargon and presents easy-to-understand examples.
✔ Portfolio options are available for conservative and aggressive investors.
✔ Clear math illustrates inflation’s impact.
—Are you interested in me including a **case study** that shows how someone managed to protect their wealth during the hyperinflation of the 1970s? Just tell me! 😊