By Kris Sayce, editor, Casey Daily Dispatch
We continue our quest…
To help you fight back against inflation.
If you missed Monday and Tuesday’s Dispatch, we’ll catch you up below.
Then we’ll show you some simple changes for your portfolio that can help you beat inflation…
First, if this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Nick Giambruno and Dave Forest. And from the founder of our business, Doug Casey.
Today, we’ll look further at how investors often miscalculate their returns… and the change you can make to ensure it never happens again.
How Inflation Steals From Your Future
If you’ve been reading the Dispatch, you know inflation is a bigger threat to your investments than you probably think.
It masks your true returns by making you think you’re doing better than you really are.
For instance, if you make a 10% per year return on your investments, that’s not your real return. You have to account for inflation.
As we saw yesterday, if inflation is 2%, your real investment return is only 8%. If inflation is 3%, your real investment return is only 7%. And so on.
And if that doesn’t seem like such a big deal, yesterday we showed you just how big a deal it is.
As a refresher, take our example of a 10% annual return and 2% inflation (for a real return of 8%).
Over 30 years, that seemingly small inflation rate would cost an investor over $700,000 in lost savings. (We’re keeping this simple, so we didn’t factor in transaction costs or taxes.)
It’s an extraordinary sum.
So, how can you work around this to improve your returns, without necessarily taking excessive risks?
The return you need from your investments is something you’ll need to figure out. That will depend on your current level of savings, your employment income, and the amount you can reasonably save each year.
It will also depend on how much you think you’ll need in savings in retirement, to fund your desired income.
That said, we can help…
Again, we’ll keep this simple. If you expect the inflation rate to be 2% each year, and you need a 10% return on your money after inflation… you need to find a way to increase your investment return to 12% per year.
Now, these numbers are just examples. You may only need a real return of 8%, 7%, 6%… or maybe less than that. As we mentioned, that depends on your lifestyle, savings, and income.
But let’s look at one example in more detail. You’ll see how a small change in a portfolio can make a big difference…
Good Returns to Better Returns
Let’s suppose you have your money split equally over five investment types or assets. And let’s suppose your portfolio looks like this:
(Note that we’re using conservative numbers. This is for illustrative purposes only.)
In this example, with five equally split investments, with varying returns over a year, we’ve achieved an 11.6% real return.
But our assumption is that – because of inflation – this is less than you would like to achieve. What if you needed to increase your real return to somewhere around 15%?
What can you do to bump your returns? And do it in a way that doesn’t cause you to take on extra risk?
Well, one option would be to take an amount from the lower-return investments (which may also mean they’re lower-risk) and put that into the higher-return investments.
Here’s how that could look:
Take a look at the “allocation” column for investments 1 and 5. By moving some money around, you’ve achieved your 15% total real return.
However, there’s one problem here…
You’ve halved the amount that may be in your safest investment. (You went from a 20% allocation in Investment 1, to 9%.)
Even though Investment 1 is barely returning you anything above the rate of inflation, at least it’s safe.
So what’s the alternative?
It’s actually quite simple. Take a look at our next example below.
In this example, we’ve simply added a higher-return investment type… and taken a small allocation from each of our other assets.
Here’s the result:
You can see we now have six investments instead of five.
We’ve taken 1% from each of our original five investments. And we’ve put that into a higher-reward – and presumably, higher-risk – investment with only a 5% allocation.
We’ll say it again. We’re using a very basic example.
But by making a relatively small change to the portfolio, we’ve increased the total real return from 11.6% to 14.9%.
That’s pretty much right on target. And we’ve done it without taking on excessive risk.
This Fits in Perfectly With the Casey “10 x 10” Approach
The point we’re making here is that, too often, investors panic.
They think they need to make radical changes to their portfolio… that they need to put everything into a handful of speculations… and hope for the best.
That’s just not true. We’ve shown you that here.
Now, the final thing you may ask is: How does this approach fit in with the Casey “10 x 10” Approach to investing?
It fits in perfectly well. Admittedly, the example returns we’ve used are lower for some of the assets than what we would recommend in our investment services.
But we also understand there are other investments that may fall outside the “10 x 10” approach.
For instance, cash (but not too much cash, as we wrote on Monday)… low-risk fixed interest… and rental real estate or REITs (real estate investment trusts).
The bottom line is this…
There are ways to make meaningful improvements to your returns without burning down your portfolio and starting from scratch.
And there are ways to do it that don’t involve you taking outsized risks. So, just as we’ve suggested previously with our “10 x 10” Approach, why not look at your portfolio today?
What returns are you getting after inflation? Are they enough?
And if not, can you take a small amount of capital from some of your existing plays… and reallocate that to a higher-return asset or asset class?
Our bet is that it will be much simpler than you think… and that it will make a meaningful positive impact on your investments.
Editor, Casey Daily Dispatch
P.S. As we said, we used conservative numbers for most of the returns in our examples. But for the sixth investment type, we’ve used a real example.
That 78% return is the current average open return on Dave Forest’s lucrative warrants plays. The best-performer in that list is up 1,378%. That’s almost on a par with two of the all-time best warrants returns in Dave’s services… They gave his readers the chance to bag gains of 4,942% and 2,805%.
Warrants are a great way to get exposure to higher returns, without needing to invest a large amount. For details on how you can add warrants to your portfolio, go here. Dave will share all the details with you.