I started my career as a financial analyst at Reuters in 2001.
It’s one of Bloomberg’s main competitors.
Since then, I’ve seen hundreds of “blueprints” for how to make money in the markets.
Here’s the reality: Most of them will tie you up in knots with complicated jargon and elaborate strategies.
That’s why I like to keep things simple…
The simpler an investing strategy is… the easier it is to stick with. And these strategies don’t drain your mental energy. So you can enjoy life instead of fretting over your portfolio.
With that in mind, let’s look at how you can stay ahead of inflation in your portfolio.
There are plenty of convoluted theories on how to do that. But history shows one easy-to-follow strategy is undefeated versus inflation.
All you need to make it work is a long-term mindset…
If you’ve found The Daily Cut in your inbox for the first time, congratulations.
It means you recently subscribed to one of the investment advisories we put out at Legacy Research.
It’s the publisher of my colleagues Teeka Tiwari, Jeff Brown, and Nomi Prins.
My mission is to help you move the needle on your wealth by plugging you into their best ideas, insights, and recommendations.
I’m also here to help guide you through difficult times like we’re living through today.
The government’s official inflation gauge is the Consumer Price Index (“CPI”). It shows prices are up 7.7% over the past year.
At that pace, the buying power of your savings gets cut in half every nine years.
And inflation is likely even higher than the government wants us to believe.
So clearly, we need alternatives.
And history shows there’s one asset class that always vanquishing inflation… if you hold it over the long term…
This pattern has held up for about 70 years… so odds are good that this asset class will continue to keep your wealth safe for decades to come.
Even better, this asset class is likely something you already own – stocks.
It’s all in this next chart…
It looks at stocks, cash, government bonds, commodities, residential real estate, and gold.
And it shows how often these asset classes have outperformed inflation (vertical axis) over different holding times (horizontal axis).
Pay attention to the black line on the chart. It shows what percent of the time stocks – represented here by the S&P 500 – have beaten inflation.
Over any two-year period, stocks have beaten inflation about 70% of the time. And when you look at 8-year holding periods, it’s close to 80% of the time.
Now look at the top-right of the chart. Once you get to holding periods of 20 years or more, stocks have a perfect record of beating inflation.
All you had to do was hold the S&P 500 for the long run, and inflation wouldn’t have been a problem.
When inflation is rising, companies often raise the prices of their goods and services ahead of rising costs.
It’s what Wall Street types call pricing power.
Take Cheerios, for example. The company that makes the popular cereal brand Cheerios, General Mills, has raised prices five times over the past year.
Prices are up over 20%… but demand hasn’t dropped.
If General Mills’ costs have gone up only 18% or 19%… and consumers continue to buy its cereal boxes at a 20% markup… its profits go up.
That’s why, this August, U.S. corporate profit margins hit highs they haven’t seen since 1950. Businesses have been passing on rising costs to their customers… and then some.
Eventually, in a runaway inflation scenario, that game will come to an end. There are only so many price hikes consumers will take before they start buying fewer boxes of Cheerios.
But as we’ve seen this year, there’s only so much inflation central banks will take before they start to raise rates.
This always causes some chop in the market. It can even trigger bear markets, like we’ve seen this year.
That may be a problem for folks too impatient to stay the course with their stocks. But it’s not a problem for folks who can keep their eye on the prize.
As colleague Teeka Tiwari likes to remind his readers, short-term volatility is the “price of admission” you pay for the shot at making transformative wealth as an investor over the long term.
As I’ve been spreading the word on, the secret to thriving as an investor is diversification.
You want to have a chunk of your wealth in stocks for the long-term. But you should also put smaller slivers into more speculative trading strategies.
This can be a great way to grind out some short-term profits while you wait for your long-term gains to roll in.
Take the string of recent gains from friend of Legacy and Market Wizard Larry Benedict.
Larry was featured in Jack Schwager’s classic book on the world’s greatest hedge fund managers, Hedge Fund Market Wizards.
Schwager’s classic on hedge fund managers featured Larry in Chapter 3
Chapter 2 featured Ray Dalio. He’s the manager of the world’s largest hedge fund. Chapter 3 featured Larry.
That’s because his trading record is legendary. And as Schwager writes, he was interested only in traders who had superior risk-adjusted returns over periods of 10 years or more.
Between 1990 and 2010, he didn’t have a single losing year.
And in 2008, while the financial world was falling apart, his hedge fund made $95 million.
That makes Larry one of the world’s most prolific moneymakers.
And he recently scored some big wins for subscribers of his One Ticker Trader advisory… he’s closed nine trades in a row for a profit.
These are quick trades that are only open for days or weeks. On average, he’s managed a 12.8% gain over a six-day holding period.
You can find out more about joining Larry as a subscriber here.
Meanwhile, don’t stress about inflation. Holding stocks for the long-term means you can sleep easy.
Editor, The Daily Cut