Inflation is a silent killer. Being unaware of it will have consequences on your checking account and your investments. I’ve talked about inflation in the NEST Edge before, and one of the pillars of my process is to measure and map inflation and understand the rate of change. While there is no way to protect the US dollars you have in your savings account from inflation, you absolutely can take advantage with your investments. 

Let’s make inflation real simple. If the price to buy the stuff is rising - that's inflation. And as with most things, if you wait until a government agency tells you inflation is here, you’re already behind. 

Again, this is really simple: if input costs are rising (AKA, commodities) then prices are going to go up. Companies are always going to pass rising costs on to the consumer. They’re not trying to make friends - they’re in the business to make money. 

One way we counter this is by literally owning the very input costs that are driving up the increasing prices you are seeing across the board. It's not going to help you buy that gallon of milk (up 4% in a month) or pay your gas bill (up 37% in a month), but your investments can offset some or all of those increases. 

Recent examples of input costs / commodities: 

• Oil
• Up 8% in last 30 days
• Up 54% in 2021
• Natural Gas
• Up 37% in last 30 days
• Up 132% in 2021
• Cotton
• Up 4% in last 30 days
• Up 26% in 2021
• Lithium
• Up 44% in last 30 days
• Up 254% in 2021

The moral of the story is: don't fight the game in front of you. Play the game you're in. If commodities are ripping and driving prices up, own the damn commodities. 

Obviously I reserve the right to change my mind if the data changes, but It is probable that we are going to see inflation continue to ramp up into the close of the year. So as of now, we will continue with our game plan of being positioned for rising inflation. 

Another way to take advantage of rising inflation is realizing the US dollar is not the only currency that is being affected. British pounds or Euros are rising in value while the dollar falls. The currency market is a relative game, so if one currency is falling, another one is rising. It’s not probable we will see the same type of ramp up in growth and inflation that we saw at the end of 2020 and beginning of this year, but it could be pretty aggressive. Measure & map; rinse & repeat. 

Most investing strategies are too rigid and/or anchor on prehistoric methodologies that are trash when you start thinking objectively. Most completely ignore inflation’s impact all together. They will only look at the end result of the return and try to weigh things to hit that same return.

Their thought process is something like: “Well 70% of the time it makes 6%, so let's just assume going forward it will make 6% a year, and weigh that in at 10% of the portfolio at all times” - which sounds like the thought process of an idiot to me, and is the basis for the traditional, lazy, and insane 60/40 model. 

This thought process is praying that past performance will result in future returns. I don't pray for returns. I do not have all the answers - and no one does - but one key to our success has been focusing on data and being able to adapt. Investing is not a linear game played in 2D. 

In other news for clients, don't be alarmed but the next few weeks you will begin to see changes when you log in directly into your folio portal. As a refresher, Goldman Sachs bought Folio in 2020 and behind the scenes has been working on some very exciting new capabilities which we will start to see into the close of this year. The very first wave of this is the branding of the website. The functionality will be the same for a bit, but the colors and names will start to change soon. 

But one thing that most likely won’t change anytime soon (see what I did there?) is inflation. Join Dan and I on October 13th at 12:30PM CST to learn how to play the inflation game.

Sean McDougle, CFP®