Dealing with and maybe profiting from inflation

Last July, I wrote about inflation as it seemed to be back. Six months later we can definitely say that it’s back, with prices up about seven percent compared to a year ago. Certain goods and services are a lot more expensive, generally the stuff you need every day like food, gasoline and shelter.

What’s different now is that stock markets are in bear territory. As usual, those who are nervous or have the most to lose are bailing. The S&P 500 Index peaked at 4801 on December 30, 2021 and is now at 4398. More worrisome are that some of the better known stocks in the index are down a lot more than most, including Apple and Netflix. Finding a safe financial harbor now is tough. If you can find one, it’s likely that continued inflation will eat away at your net worth.

Our portfolio was hit too. It peaked briefly above $2M in December, wavered back and forth, then steadily lost value as markets sagged. Our portfolio is now down about $70K, which could be much worse. Part of the reason it’s not is that certain illiquid parts of our portfolio, mostly our house, keep appreciating.

Crypto is not proving to be market forces immune, as popular coins are down more than markets in general. Apparently the law of supply and demand applies to it as well. So at the moment I feel good that we only own about $200 in cryptocurrencies. Maybe it’s time to invest instead in gold stocks, the safe harbor most used to go for before crypto.

So what can you do to cope with inflation? Some of us are fortunate to be well cushioned. My pension is fully indexed with the cost of inflation, and now that I’m on social security, it is too. Like a lot of retirees, our house is paid off so rent increases aren’t an issue.

One thing you could do is find a better paying job, which is very trendy. This time though not only shop for an inflation-beating raise, but look at a company’s fundamentals. Do they offer a pension? It’s a great reason to work for them. Do they offer a significant employer match to a 401-K plan, like 3-5 percent? That’s even better. It’s free money that can compound until you retire. Today, employees have a once-in-a-generation opportunity that puts them at an advantage in the labor pool. It’s a shame to waste the opportunity, particularly if you can negotiate a work from home contract. You can save thousands of dollars and thousands of hours a year by working from home.

It’s hard to spend less on what are arguably essentials. You probably won’t find cheaper rent elsewhere, and shopping for gas on GasBuddy will only take you so far. If my income were modest enough, and even if it weren’t, I’d be looking to see if I was eligible for food stamps. Some things that cushioned the pandemic are disappearing: the child tax credit and extended unemployment insurance. But most communities have food banks. I’d feel no shame going to one if I needed to. I grew up with second hand clothes. I’d feel no shame buying used clothes at a Salvation Army. Buying new clothes should be considered something of a privilege.

If you do have some spare cash, a bear market is an obvious time to “buy the dip”. No downturn lasts forever. It’s unclear if a dip in markets will translate into a recession, but you’ve got better than even odds that a year from now the markets will be higher than they are now. Stocks like Apple and Netflix are down more than the market in general. These are quality stocks. It would be tempting to buy some now and hold them for five years or more.

If interest rates are doomed to rise, that can be good if you have savings. Shop around for a bank that pays good saving rates. Ally Bank, where I do most of our banking, is one such bank. Also, if you pay off your credit card balances, look for no-fee cash back credit cards and plastic every expense you can. I have a Pentagon Federal Credit Union no fee 2% Power Cash Rewards card, and routinely get $60 – $100 a month in cash back.

Nearing retirement age? Retirees generally flock to southern states like Arizona and Florida. As a result both states help lead the country in increased house valuations. If your house is paid off, the better value may be to stay right where you are. But if you do want to move, there are places where housing prices aren’t going through the roof. This is true of much of the Midwest and northeast.

I recently had a discussion with my friend Tom from childhood, whose career went south toward the late 2000s due to market forces. He now lives in Oregon. He’s been scrambling on a lot less income and much of his nest egg is gone. I recently suggested he move back to where we both came from: upstate New York. I’ve known others other than me who did this and profited.

In my case, moving from the D.C. area to Massachusetts made financial sense because my pension is exempt from state taxes, offsetting the higher real estate taxes. Unless you are clustered in or near a major city like New York, house prices are awfully cheap in places like Binghamton where I grew up. It’s not at all hard to find a nice house in a safe neighborhood for $100 – $150K.

Many of these states are known for high property taxes, but if your house isn’t worth much and you buy a house for cash from the proceeds of selling your current house likely worth a lot more, paying $5000 a year in property taxes which you are probably paying already shouldn’t be that big a deal. Seniors tend to get extra exemptions and various tax breaks too and these states tend to offer better social services for the extra taxes they charge. All this and you are positioned well for climate change: these states are cooler in general, greener and have good water supplies. Run the numbers and you may be surprised.

In general, to the extent you can, stick with a sound financial strategy: invest regularly and methodically in a broad range of funds and time will likely ensure that you beat inflation. The world is changing but in some ways for the better. Working from home was not an option for me for most of my career. Now the infrastructure is in place to make this doable for many of us in the service sector. Major changes like we are going through now also permit major opportunities not generally available. By capitalizing on these changes, you can profit from them. That’s one way to beat inflation and have a better life too.