Investing For High Inflation in 2022 – Cut Through the Noise

April 7, 2022

Inflation hit 7.9% in the month of March 2022 and mortgage rates are moving up.

Bonds, which are supposed to be a save haven for retirees, had one of the worst months in the past 42 years….

Is it time to invest in real assets to combat high inflation?

Making wise financial decisions during uncertain times is vitally important. In the latest segment of Cut Through the Noise, Alex and Anthony discuss their thoughts and what people should be thinking about.

Show Notes:

Full transcript:

SPEAKERS

Anthony Saffer & Alex Okugawa

Alex Okugawa 0:00
Hi there and welcome to our segment cut through the noise where today we answer your questions that we’ve been hearing throughout the month. Today we’re talking about the carnage in the bond markets, rising mortgage rates, investing in real assets, and what to do with your tax refund. Stay tuned.

Hi there, it’s Alex and Anthony from degree advisors. If you enjoy today’s content, please like and subscribe for more Anthony. Let’s get into it. So bonds have been having a really tough time the past several weeks, a tough, tough month.

Anthony Saffer 0:31
The worst month in 42 years, March here of 2022. And it’s tough because stocks for the most part have gone down year to date as well. So investors have taken a hit on both sides. Yeah, Jim

Alex Okugawa 0:41
Bianco put out a pretty interesting tweet, which we’ll post right now. Just showing the current carnage in the bond markets. He said if today was the end of the month, and he posted this on March 25, March would have been the worst total return month, in over 42 years. I mean, this is tough, because you know, you think about a classic retiree, and they go into retirement or they’re preparing for time. I mean, bonds are the staple bonds where people go to generate some yield, create some safety, and create some income. And we’re here we are having one of the worst months and a long time. Right.

Anthony Saffer 1:14
So that’s the question people are asking is should I still own bonds? Right? And we think we think people should, but there are also other ways to manage risk, whether it’s a tactical risk management strategy, having some cash on the side, and you know, being well-diversified overall.

Alex Okugawa 1:28
Yeah, no, it’s tough. I mean, there’s no easy answer, but at the same time, there is no free lunch, you know, right. But like, Well, what else is out there where the same risk profile bonds, but you know, I can get some great returns, it isn’t always like that.

Anthony Saffer 1:41
All right, so next thing, mortgage rates are on the rise mortgages have shot above 4% For the first time since 2019.

Alex Okugawa 1:48
Yeah, so let’s pull up this chart real quick. This is from koi fin, this is going from looks like March of 2019. To March of this year, yeah, I mean, breaking up almost a four and a half percent. The thing is, when I look at this, it’s still relatively low compared to history. So yeah, of course, in the past three years, it looks like it’s shooting up high, things are still pretty low. But I don’t know, when you look at mortgages, versus like, what a $600,000 home, just as an example, good luck finding something for 600k in San Diego, right? Um, but if you look at the price, or the cost of that mortgage, of like, a two and a half 2.75% mortgage rate for versus four and a half percent, I mean, it’s a night and day difference. So I don’t know where people are just gonna magically start coming up with all this money. You know, there’s this thought, Oh, it’s just all supply and demand, I don’t know, I think rates are going to go up. And prices are probably going to come down. That’s just my hunch.

Anthony Saffer 2:44
So will we see a frenzy of buyers that are looking to get in before they go up further? Or has the increase already slowed things down?

Alex Okugawa 2:53
Probably, I mean, I don’t know, probably initially. But here’s the thing, if you think about all these people that have refinanced into super-low mortgage rates, right, two and a quarter, yeah, two and a half. Unless they’re going to be staying there for a long time, what’s the mortgage rate gonna be like in five to 10 years from now when they move, you know, so I think this is going to create potentially a real big issue where people are just not going to move, they’ve locked in an incredibly low mortgage rate. And if they move, right, they’re going to be moving into a different house, but now their mortgage rates are a lot higher, their monthly payment might go up. So I see that as a potential long-term issue where people are just not going to be moving because they got such a low rate right now.

Anthony Saffer 3:33
Yeah, I’d be interested in those professionals that are watching the mortgage in the real estate industry, to comment on what they’re seeing out there.

Alex Okugawa 3:41
All right, I’ve been seeing this a lot. folks have been asking us about this, you know, with inflation is as high as it is. Is it time to invest in real assets? Because historically and last, that’s what you see a lot in the news, they’ll say, invest in real assets. I mean, I was seeing some articles in like Yahoo Finance, like Elon Musk says, invest in these three things. So it’s out there, people are talking about it. I mean, how should people be thinking about investing in real assets?

Anthony Saffer 4:10
So when we’re talking about real assets, it’s real estate, commodities, precious metals, things like that. And they’ve done quite well. I mean, not, not everything the same, but done. Well, you know, over the last year, as inflation is taken off, inflation, the last marker 7.9%. So high right now?

Alex Okugawa 4:29
Now the question is, is what’s going to store value, right, because not all real assets are the same. I mean, you want to think strategically about what you’re getting into. I mean, a lot of people love real estate and real estate can be a great diversifier. But you and I both know and you, you know very well from a lot of experience, I mean, sometimes when people get too heavy into real estate, they just end up they feel a little trapped, and they’ll say that real estate’s bad because it is good and it can be a part of a diversified portfolio. But I always want to caution people against like getting way too heavy into real estate because then you’re locked in, you don’t have a lot of flexibility. And then eventually when it does come a time, or maybe you do need to sell to generate liquidity, you’re looking down the barrel of a potentially huge tax bill unless you do like 1031 exchange.

Anthony Saffer 5:18
With commodities I mean, they were in the downward trend for, 1 to 2 years before the most recent run-up. So it’s good to have that diversification. But to overly rely on them can be very fickle as an asset class.

Alex Okugawa 5:31
Yeah, cyclical and it can whipsaw you right investing in those. All right, last thing here. So what to do with your tax refund, I always have an issue with this phrase, tax refund, it’s not a tax refund, it’s a tax overpayment, right, people overpaid taxes. And that’s not necessarily a bad thing if it’s forced savings, but what should people do with a tax refund? If that comes in?

Anthony Saffer 5:53
Yeah, I mean, everyone has to think of their situation, but look at productive uses of that money. I mean, if you think of vacation as needed for the family, and that’s how you’re going to do it. And, you know, make that decision as to what’s best, but paying down debt investing, you know, giving, if that’s a productive use of your money, and hopefully it is impacting your community, all those types of decisions are, you know, the potential for that tax overpayment?

Alex Okugawa 6:18
Yeah, I’d say the other thing, too, is just consider adjusting your withholding. Yeah, right. Now, still, pretty early in the year, you can adjust your withholding for the rest of the year. Also, being aware of any major life changes. I mean, I just had a conversation with a client the other day, and the wife’s going to stop working. And so that is going to impact their total income, but that can also impact their tax withholding, how much they need to withhold, etc.

Anthony Saffer 6:41
So that’s something important to consider because at the end of the day, it’s an overpayment, the government’s holding on to your money interest-free, and you could be doing something else with it throughout the month. Yep.

Alex Okugawa 6:48
And now let us know what you think. Leave your thoughts in the comments below. And if you have ideas for future videos, we’d love to hear about them. If you enjoy today’s video, please like and subscribe for more. Thanks for watching.

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This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures