Transcript:
Easan Arulanantham:
If inflation keeps getting worse, you know, what are some possible good investments for the outlook?
Tom Vaughan:
Yeah. So if you look, the overall stock market is down during this inflationary time period, the overall bond market is down during this inflationary time period, both because there’s expectations for higher interest rates, right. So when rates go up, it basically makes equities there’s a couple reasons that equities might fall in that environment. Number one, it makes it more expensive for businesses to operate, right? If they go borrow, you’re gonna have to spend more for that interest and what have you. And, you know, so we’ve got a scenario also where, because inflation is going up, they’re having to pay employees more, which can also impact their earnings. And then we’ve got the gas prices going up. And I know, target said that that was one of their big problems was transportation costs have gone up so much. And so all of these are difficult on the stock market as a whole. And generally speaking, in terms of just which investments might do the best, there are three that have done well, that could continue to do well, if we continue to have similar scenario. So number one, would be a treasury, inflation, protection, security. And so that that’s a what they call a tip, right? So it’s a treasury that is designed to pay more as the rates go up. And so what it does is it kind of insulates at least somewhat. So the price because normally the price would fall in a bond as rates go up. So that’s what we’re trying to watch out for as far as that goes. And that doesn’t have as much of a problem in a tip, specifically short term tips of what had been doing the best. And that’s certainly what we have in our portfolio. A couple of other areas that have done well, so far this year are, of course, energy, energy is up tremendously. So far.
This year, I’d be a little bit nervous about jumping into energy just because it is so high comparison. And Saudi Arabia has mentioned that they’re willing to come in and replace some of this Russian oil, if needed. And so they could bring down the price themselves. So it’s a little bit of a weird thing. But energy generally does well in these type of inflationary environments. And then the other thing that’s doing well, so far as utilities, so utilities are, you know, a safe haven when the markets falling, they pay a fairly high dividend on a real on a relative basis. And so that’s considered an inflationary hedge as far as that goes. Obviously, one thing if you have the money is property, right? I mean, so if you buy a property have high inflation, for a long enough period of time, rents are going up, one of the big drivers of current inflation is the increasing rent. And so for those people that have rental properties, this is a pretty good environment, at least for them not so great for the renters. But for those for the owners, this is not a bad place for an investment either, I’d be a little nervous about buying new property, just because we have had the lowest number of new mortgage applications for new home purchases and 22 years last this week. And so, you know, and yet a new a new home building permits dropped last month, not significantly, but dropped. And there’s some writing on the wall here with these higher mortgage rates, that we might be seeing some slowdown in the price of real estate.
So if you run out to go buy a property, so that you can rent it out and have some increase, that that could be a little bit tough to do right now with these prices, too. So that’s one of the things with both energy and real estate, they’ve had such a big run, it’s a little bit difficult, you know, utilities could continue to do well, tips could continue to do well here too. So those are a few things that, you know, obviously we can look at, as far as that goes, honestly, you know, cash isn’t a terrible thing, either. It used to be always, you know, the money markets paid zero, they’re gonna pay more now. But zero is still better than the stock markets down when it’s 17 18%. On the S&P 500, zero looks good. So, you know, they’re just some, some key pieces there to take a look at. It’s not that easy to figure out, because you really have to have some determination of what might be happening with the market. You know, the market does work in advance, you know, six to 18 months in advance. And so if the market starts to see some softening and inflation, the market could take off, and you’re over here in these things that are designed to do well in an inflationary environment. So I would still have a majority my portfolio in the broad arena, just because things can change really fast, you know, as far as that goes, and so keep that in mind.
Easan Arulanantham:
So is there any kind of like investment that you would recommend to get exposure to kind of the, like utilities and energy without really over exposing yourself?
Tom Vaughan:
Yeah, well, it’s just a matter of percentage of your portfolio. Oh, you know, so that’s, that’s important. You know, we have targeted pieces that we use, you know, anywhere from 3% to 6% You know, depending on the aggressiveness of the portfolio or even down to zero, you know, depending on how conservative portfolios but one of the pieces for for energy is two big ones. They’re very similar but one is the spider energy, you know, SLE is the ticker symbol. And the other one is the Vanguard energy with VD e is the ticker symbol. Those are both pretty good. You know, the Vanguard is more broad has a bit more in it has been a bit more volatile. The XLR is just S&P 500 companies only. So it’s a little bit more, you know, conservative, but both of those are really good quality. Mostly they’re driven by Exxon and Chevron for both of those, they’re the big holdings. If you look at the utility side, again, Vanguard utility VPU is a good one. Very similar, you know, X L u is the Spyder utility XL us, S&P 500. Only the VPU has a much broader portfolio. Both of those are fine, in my opinion for this particular environment as far as that goes. And so that, you know, yeah, it was a good question.