[chassis]

2000cs My personal view is that retirement status is relevant to the discussion, and is why I asked you what your volatility tolerance is. What is it?

I have seen up close and personal investors (human beings) drastically change their risk (volatility) tolerance after they pass the magic threshold of 59.5 yrs (IRA/401k handcuffs gone) and after they start receiving Social Security benefits.

This is very easily seen on the bogleheads and early-retirement sites. People who are mid-late 60s of age or older are far less volatility tolerant than people under age 60, most of whom are in the capital accumulation phase of investing. On those sites I mentioned, people in their 80s and 90s are posting. Some people aren't aware of this, and the threads degenerate into conflict. There will almost never be agreement between a 45 year old and a 90 year old on investing strategy. Yet those two ages of posters are engaging in discussion on those sites.

So 2000cs if I suggest to you investments that make sense for my portfolio, and I knew that you are retired, I would anticipate the reply that "that stuff is too spicy", because of your retirement status. The discussion at that point would be pretty boring.

However, if you answer the question about your current portfolio volatility (measured by its 5yr standard deviation), we can have a productive discussion on this thread. My portfolio standard deviation, including cash, is a few points higher than SPY, with some of my holdings around twice the SPY standard deviation. Excluding cash, my standard deviation is quite a bit higher than SPY.

[2000cs]

Originally Posted by chassis

2000cs My personal view is that retirement status is relevant to the discussion, and is why I asked you what your volatility tolerance is. What is it?

I have seen up close and personal investors (human beings) drastically change their risk (volatility) tolerance after they pass the magic threshold of 59.5 yrs (IRA/401k handcuffs gone) and after they start receiving Social Security benefits.

This is very easily seen on the bogleheads and early-retirement sites. People who are mid-late 60s of age or older are far less volatility tolerant than people under age 60, most of whom are in the capital accumulation phase of investing. On those sites I mentioned, people in their 80s and 90s are posting. Some people aren't aware of this, and the threads degenerate into conflict. There will almost never be agreement between a 45 year old and a 90 year old on investing strategy. Yet those two ages of posters are engaging in discussion on those sites.

So 2000cs if I suggest to you investments that make sense for my portfolio, and I knew that you are retired, I would anticipate the reply that "that stuff is too spicy", because of your retirement status. The discussion at that point would be pretty boring.

However, if you answer the question about your current portfolio volatility (measured by its 5yr standard deviation), we can have a productive discussion on this thread. My portfolio standard deviation, including cash, is a few points higher than SPY, with some of my holdings around twice the SPY standard deviation. Excluding cash, my standard deviation is quite a bit higher than SPY.

I like risk and have a high tolerance but I don’t invest without doing a lot of research and I stay on top of my investments. In other words, I’m very active. If I was passive I’d be into funds. As my faculties diminish I will probably rotate into safer investments and ultimately funds, because I won’t be able to manage risk at all well.


But again the thread isn’t about personal investment so much as the broader strategies for an inflationary environment. Will growth stocks be performers? Will dividend stocks decline in value as rates rise (like a bond)? What about dividend stocks where there is a history of annual dividend increases? Mining and minerals sector? Real estate or REITs, Etc. Just curious what people think overall - macro. Not individual stock picks nor portfolio advice per se.

[chassis]

You are asking questions that devolve into, "which stock should I buy?" discussions.

Always have equity exposure, as much as your stomach allows, plus a little more.

Yes, growth stocks will outperform. They always do, that's why they are called growth stocks.

Dividends across the market have been declining over the past several decades, I see no reason for the trend to reverse. In its place, stock buybacks have become more popular as a way of returning capital to investors. Retirees in the 1970s and 1980s use the "bonds and dividend stocks" formula with some degree of success. I don't see this as today's reality. Today's interest rates have driven bond yields to the floor, and with expectations of rising interest rates, bond fund price risk is a reality. Dividends have already been discussed, they are becoming less important than they were in the past.

The sector questions you ask (mining, REITs) are close to "what stock should I buy?" questions. Those aren't macro questions. If you like mining, and have special knowledge about it, buy mining stocks. Same comment for REITs and any other sector or stock.

2000cs what sector or industry are you most familiar with, for example from your working career? That is a basis for special knowledge.

I have an industrial and financial background. I am comfortable assessing these types of companies; I know what good looks like, and what it doesn't look like. Recently I was asked my opinion of a mining company in another country, ran it through my investing criteria, combined it with whatever special knowledge I have, and said, "No." Another person with more special knowledge than I have may have said, "Yes."

[2000cs]

Originally Posted by chassis

You are asking questions that devolve into, "which stock should I buy?" discussions.

Always have equity exposure, as much as your stomach allows, plus a little more.

Yes, growth stocks will outperform. They always do, that's why they are called growth stocks.

Dividends across the market have been declining over the past several decades, I see no reason for the trend to reverse. In its place, stock buybacks have become more popular as a way of returning capital to investors. Retirees in the 1970s and 1980s use the "bonds and dividend stocks" formula with some degree of success. I don't see this as today's reality. Today's interest rates have driven bond yields to the floor, and with expectations of rising interest rates, bond fund price risk is a reality. Dividends have already been discussed, they are becoming less important than they were in the past.

The sector questions you ask (mining, REITs) are close to "what stock should I buy?" questions. Those aren't macro questions. If you like mining, and have special knowledge about it, buy mining stocks. Same comment for REITs and any other sector or stock.

2000cs what sector or industry are you most familiar with, for example from your working career? That is a basis for special knowledge.

I have an industrial and financial background. I am comfortable assessing these types of companies; I know what good looks like, and what it doesn't look like. Recently I was asked my opinion of a mining company in another country, ran it through my investing criteria, combined it with whatever special knowledge I have, and said, "No." Another person with more special knowledge than I have may have said, "Yes."

I am really not trying to ask for personal investing advice, but obviously I’m not communicating what I am asking very clearly. So let me try again…

I’m interested in what makes sense (investing, divesting, purchasing as a consumer and purchasing as a business, etc) if we are about to begin an extended period of persistent inflation. Big picture, not specifics.

By way of example and preliminary thoughts, I was a young adult through the 1970s in which we had inflation and then economic stagnation (low/no growth), referred to as stagflation. This persisted into the mid-1980s - about a decade. It was triggered in large part by two OPEC oil crises (huge price increases for the time), and characterized by rising interest rates and inflation in goods and wages.

Again, I was a young adult so my experience of this period is more limited than older folks, but I recall people investing in houses and flipping them very quickly (SoCal) and making very good money - but not doing a lot of remodel as we see in today’s flips. I knew people who had rental properties (multiple rental houses, duplexes and triplexes, apartments via partnerships) but I don’t recall there being many if any REIT investments available. Those with rentals at the start of the inflation period did very well as they were able to raise rents and their properties appreciated. On the other hand, bonds sucked as rising yields depressed their prices forcing hold-to-maturity if you wanted your principal back. Commodities were good, especially oil and gas reserves. Collectibles and art were big and also good for shielding taxes. And so forth.

What’s different now? Well, we have REITs, fossil is under political pressure because of carbon, lots more funds available, etc. Classic cars have really emerged. There are even some art syndicates. And international markets are much more accessible. Brokerage costs have nearly disappeared for stocks, but real estate, art etc are very expensive to transact still.

So the investment/divestment question is would we expect the same classes and general themes to perform like in the 1970s or are there differences that make for better approaches? What are the characteristics of a good investment and a bad investment in inflationary times?

On the consumption side, before Costco and Sams in the 1970s it was common to buy ahead “staples” that you knew you’d use (canned goods, non-perishables, clothing, etc). Businesses held inventory in the same way because the inflation risk exceeded the carrying cost. That’s all changed as we have instant availability and JIT sourcing. Will businesses and consumers return to this behavior?

What else bears thinking about? Maybe wages (some jobs track inflation better than others?).

This is what I’m after. More of an academic curiosity; not looking for specific advice for my personal circumstances.

Clearer?

[chassis]

Originally Posted by 2000cs

I am really not trying to ask for personal investing advice, but obviously I’m not communicating what I am asking very clearly. So let me try again…

I’m interested in what makes sense (investing, divesting, purchasing as a consumer and purchasing as a business, etc) if we are about to begin an extended period of persistent inflation. Big picture, not specifics.

By way of example and preliminary thoughts, I was a young adult through the 1970s in which we had inflation and then economic stagnation (low/no growth), referred to as stagflation. This persisted into the mid-1980s - about a decade. It was triggered in large part by two OPEC oil crises (huge price increases for the time), and characterized by rising interest rates and inflation in goods and wages.

Again, I was a young adult so my experience of this period is more limited than older folks, but I recall people investing in houses and flipping them very quickly (SoCal) and making very good money - but not doing a lot of remodel as we see in today’s flips. I knew people who had rental properties (multiple rental houses, duplexes and triplexes, apartments via partnerships) but I don’t recall there being many if any REIT investments available. Those with rentals at the start of the inflation period did very well as they were able to raise rents and their properties appreciated. On the other hand, bonds sucked as rising yields depressed their prices forcing hold-to-maturity if you wanted your principal back. Commodities were good, especially oil and gas reserves. Collectibles and art were big and also good for shielding taxes. And so forth.

What’s different now? Well, we have REITs, fossil is under political pressure because of carbon, lots more funds available, etc. Classic cars have really emerged. There are even some art syndicates. And international markets are much more accessible. Brokerage costs have nearly disappeared for stocks, but real estate, art etc are very expensive to transact still.

So the investment/divestment question is would we expect the same classes and general themes to perform like in the 1970s or are there differences that make for better approaches? What are the characteristics of a good investment and a bad investment in inflationary times?

On the consumption side, before Costco and Sams in the 1970s it was common to buy ahead “staples” that you knew you’d use (canned goods, non-perishables, clothing, etc). Businesses held inventory in the same way because the inflation risk exceeded the carrying cost. That’s all changed as we have instant availability and JIT sourcing. Will businesses and consumers return to this behavior?

What else bears thinking about? Maybe wages (some jobs track inflation better than others?).

This is what I’m after. More of an academic curiosity; not looking for specific advice for my personal circumstances.

Clearer?

2000cs It's clear and has been from the first post.

Invest heavily in equities. That's the reply to your question.

You have a penchant for real estate, or at least to invest in real estate, is that correct? You have mentioned real estate and REITS several times in several posts. You are looking for someone to say, "Dive in to REITs!" Right?

I say dive in to equities.

You also haven't explained your volatility tolerance. My guess is that you are less risk tolerant than either you have disclosed, or than you realize. REITs are fairly low vol and low returning, compared to broader equities.

Here is some background and historical context for you: read about the Bretton Woods currency system exit, and the impact on the dollar and inflation. Then look for a parallel to the Bretton Woods exit in today's environment. Please report your findings back to this thread.

If you like, bury cash in the back yard, buy physical gold, silver and lead, horde gasoline, diesel fuel and kerosene, and load up your chest freezers with meat. I am not doing any of these things.

What is your volatility tolerance? What is the volatility (standard deviation) of your current portfolio?

[tom2021]

My worry is the Fed can't combat inflation in the future.
Hyper inflation may not happen, however 10% inflation is probable.

I do know about Bretton Woods. Now, the whole world still trust the green back. What will happen when people start thinking how uncle Sam will pay back all the debts?

Are these factors or just getting older make me sleep less?
Even with good exercise, I can't get 8 hours sleep anymore.
Sorry, for the side track. ��

[chassis]

Inflation has peaked according to several data points. Still early to say with confidence, but data show the pace of inflation is slowing.

10% broad-based inflation for a period of time? I don't think so. tom2021 do you really think this? Why? What informs your view?

[mdf]

Originally Posted by 2000cs

assume inflation is back and will run for at least a decade. Say averaging 5-6% but could be higher.

I think the premise is unrealistic. I just don't see the US economy experiencing 10 straight years of 6% inflation. On a ten year horizon, I am more concerned about federal budget deficits, and the impact of politics on the management of our economy than I am about persistent inflation.

What would I invest in, and what would I divest from, if I was expecting a decade of moderate inflation? Yes, equities as observed above. If I was expecting persistent but unpredictable rates of inflation, I'd steer towards business that can pass along price increases. With the greening of the economy and infrastructure spending, Utilities might be an opportunity, but combined with the frequency of extreme weather events we're seeing and lethargic regulatory agencies it is a sector I would probably avoid.

In terms of bonds, you could look at TIPS. There are ETFs and funds for TIPS.

Crypto is a puzzle to me. Personally, I am not investing in it. It seems so risky and speculative, I have trouble seeing it as a rational investment, and there are apparently hacks of some of the exchanges. Also I'm surprised China was the first to ban crypto, and my understanding is they've banned both mining and trading. Who is next?

[tom2021]

The Fed has been printing money for a long time, since 2008. They call it quantitative easing.
The Fed just use semantic "inflation is transitory". Is the transit to go up or to go down?
The Fed keep warning congress that only so much they can do to control inflation.
Many economist, e.g. Larry Summers, warn about high inflation.
In 1970's, the average inflation for the decade is almost 7%.
Nobody can predict how high inflation will be, I just guestimate it will be more than 1970's.

On the contrary, I am glad if I am wrong. So, I will sleep much better.

[2000cs]

Originally Posted by mdf

I think the premise is unrealistic. I just don't see the US economy experiencing 10 straight years of 6% inflation. On a ten year horizon, I am more concerned about federal budget deficits, and the impact of politics on the management of our economy than I am about persistent inflation.

What would I invest in, and what would I divest from, if I was expecting a decade of moderate inflation? Yes, equities as observed above. If I was expecting persistent but unpredictable rates of inflation, I'd steer towards business that can pass along price increases. With the greening of the economy and infrastructure spending, Utilities might be an opportunity, but combined with the frequency of extreme weather events we're seeing and lethargic regulatory agencies it is a sector I would probably avoid.

In terms of bonds, you could look at TIPS. There are ETFs and funds for TIPS.

Crypto is a puzzle to me. Personally, I am not investing in it. It seems so risky and speculative, I have trouble seeing it as a rational investment, and there are apparently hacks of some of the exchanges. Also I'm surprised China was the first to ban crypto, and my understanding is they've banned both mining and trading. Who is next?

Average inflation (CPI) for the 1970s was 7.25% and in the 80s still averaged over 5% even though the annual inflation rate declined in that decade. I don’t recall anyone in the late 1960s predicting this, although by the end of the 1970s the American economy was done and stagflation was to persist perhaps indefinitely.

So, yes, it can happen. Will it? I don’t know. I tend to doubt it but there are some underlying pressures, so it is a risk worth considering.

I share your view on Crypto and note that several governments are looking at Crypto as an official currency (The US Fed included). This would make it traceable and eliminate the value for black market transactions. There may be marginal improvements versus ACH, etc. but then if the governments make their own cryptos, what is the value of Bitcoin, Etherium and the others?

Utilities are very bond-like in that they pay steady dividends so their price responds to interest-rate changes. They may suffer some devaluation due to rising rates in an inflationary environment. Plus their rates lag their costs, so there could be a squeeze on profitability and cash flow. On the plus side, their allowed ROE should increase (again with a lag, but this time the lag helps once inflation stabilizes and begins to fall).

TIPS are a good idea; I think they really came about in the 1970s because of the devaluation of bonds during that inflation, just to help preserve value by floating the rate with inflation. Not sure there would be a good real rate of return but at least no loss of value (real or nominal).

Thanks for the thoughts.

This is the source I used for the inflation data: https://inflationdata.com/articles/i...dex-1970-1979/

[2000cs]

Another thought on utilities, specifically electric (and maybe nat gas).
In the 1970s there were no substitutes for local electric service (fully regulated, one provider). With both deregulation in many states and much better solar panels, it could make sense to install rooftop solar and minimize or bypass (off-grid) the electric utility. This would create a competitive price cap, further reducing the pricing power of utilities and making them a bad investment (at least on the margin).

For nat gas, if you believe the price will rise persistently (perhaps because of carbon regulation instead of general inflation), then you would consider switching to electric appliances and solar panels as a way to avoid those cost increases.

Thanks @mdf for stimulating these thoughts.

[zx10guy]

Originally Posted by 2000cs

Another thought on utilities, specifically electric (and maybe nat gas).
In the 1970s there were no substitutes for local electric service (fully regulated, one provider). With both deregulation in many states and much better solar panels, it could make sense to install rooftop solar and minimize or bypass (off-grid) the electric utility. This would create a competitive price cap, further reducing the pricing power of utilities and making them a bad investment (at least on the margin).

For nat gas, if you believe the price will rise persistently (perhaps because of carbon regulation instead of general inflation), then you would consider switching to electric appliances and solar panels as a way to avoid those cost increases.

Thanks @mdf for stimulating these thoughts.

Here are my thoughts on solar. I looked into having solar installed. I use quite a bit of electricity as I choose to run what amounts to a data center in my basement. The problem with solar (even with tax credits) is the initial price shock. When I looked at a system, I was looking at around $20k to replace about 40% of my usage. Next, is your home's layout and environmental situation. Is there adequate roof space? Where is that roof space pointing in relation to sun exposure? What are your local building codes? This last part was what made solar even less attractive for me. The local building codes changed just prior to me looking into solar. The code requires a setback from the roof's edge to facilitate access for firefighters to walk on the roof. Because of the setback requirement, this decreased the number of panels I could use. Next is your roof's condition. If your roof has some age to it, you either have to replace the roof (further driving up the cost of the install) or plan on paying the labor to take the panels down when a new roof is installed. Finally, I heard the inverters used in solar systems have a finite life span which is a few years. Replacing an inverter if I recall correctly is about $3k. So as you can see, it's no small endeavor to get solar installed.

The alternative to not outright buying your own system is to lease one. There are a few companies that do this such as Solar City and Vivint. The issue is in the details of the contract where they charge you an amount per kW consumed. The devil is in the details as to the increases that are tacked on over time. Not to mention that you've entered into what usually amounts to a 20 year contract with them. If you sell the house, you have to get the new buyers to assume the remainder of the contract. Not all buyers want to do this.

In the end, my decision process is very much the same as deciding whether to go EV or stay with ICE. For me neither made sense from a practicality stand point and from a financial.

[mdf]

Also REITs. I forgot to mention that. There is some special tax consequence or treatment for REITs also to look at.

[chassis]

This is the definitive source for US inflation data. If the link comes through cleanly, the graph will have a log vertical scale. The higher inflation era from 1975-1981 is clearly visible.

For those who fear inflation, please make the case with timely (recent) data why you hold the view you do.



What did investors do in the 1975-1981 period? Equities were no help. Bonds were much better returning in the 1970s than today. Today bonds are dead. Equities or alternative investments (direct investment in businesses, real estate) are a couple of the more obvious avenues.

Chart below is S&P500.

[chassis]

I spent 5 more minutes and found the solution to inflation in 1975: invest in equities.

12%+ annual return from 1975 to 1981. 2000cs in 2021, don't worry about inflation, invest in equities.

The previous chart was SP500 price only. The chart below includes dividend reinvestment.

https://www.officialdata.org/us/stoc...0&endYear=1981

[chassis]

And if equities aren't your thing, in the late 70s you could have invested in government bonds to the tune of 8ish percent.

6% inflation? Who gives a rip? Investors in the 1970s had good avenues to invest their money.

[2000cs]

Originally Posted by chassis

And if equities aren't your thing, in the late 70s you could have invested in government bonds to the tune of 8ish percent.

6% inflation? Who gives a rip? Investors in the 1970s had good avenues to invest their money.

Your timing on fixed-rate bonds had to be good and you had to hold to maturity to avoid negative real returns. I’ll have to look but I’d bet bank stocks did better with rising lending margins. Bonds held to maturity were a better investment once interest rates began to fall, if sold before maturity. There might be some bond funds that use appropriate strategies for these scenarios.

[2000cs]

Originally Posted by chassis

I spent 5 more minutes and found the solution to inflation in 1975: invest in equities.

12%+ annual return from 1975 to 1981. 2000cs in 2021, don't worry about inflation, invest in equities.

The previous chart was SP500 price only. The chart below includes dividend reinvestment.

https://www.officialdata.org/us/stoc...0&endYear=1981

That is nearly always true and certainly over long time periods. The question is in the inflation scenario, are there equity sectors that do better and others that do worse (not individual stocks)? Like maybe bank stocks would do well because they can increase their lending spread, but autos would do poorly because there is too much price competition and rising interest rates put off consumers.

Many things have changed since the 1970/80s so there could be some good arguments to avoid simply repeating what worked then. For example oil and nat gas were to some extent the cause of the inflation (OPEC price shocks in the 70s) and reserves priced up as a result. But today with carbon concerns on top of lack of oil price increases, the sector might be a dog. And earlier I kept mentioning REITs because I wonder if perhaps they are a better way to play real estate these days than trying to own and manage multiple properties oneself.

[tom2021]

The 2008 financial collapse and Corvid 19 are unprecedented. The unprecedented response, QE, seems to work thus far. Nobody knows what the future will entail. Due to these circumstances, more than ever, our financial future depends on our investment decision now, especially for those who have short term time horizon.

[wtwo3]

For some reason I read the title of this thread as "infiltration strategies".

[mdf]

Bloomberg had an investment/management interview. Cathie Wood talks about deflation.

https://www.bloomberg.com/news/featu...uality-hackers

[2000cs]

Originally Posted by wtwo3

For some reason I read the title of this thread as "infiltration strategies".

That would be more fun!