By John Pangere, senior analyst, Strategic Investor
The markets are in turmoil.
As I write, the S&P 500 Index is down 23% for the year. The tech-heavy Nasdaq is faring worse, down 31%.
It’s just plain ugly out there.
You can blame it all on a number of factors. Inflation is raging at 8.3%. The U.S. dollar hit 20-year highs. And the Federal Reserve is keeping up its relentless pace of raising interest rates… with no hint of an end.
It has investors scrambling… with the typical deer-in-the-headlights look we see during bear markets.
For years, we heard about buying the dip. Or about the Fed put, with talking heads and major investors relying on the Federal Reserve to come to their rescue.
After all, that was typically the case for much of the last 40 years. It helped fuel the rise of risky assets and growth companies.
But those days seem to be over… at least for now. Which is why what investors do today could be one of the most important decisions for years to come.
GPS for Your Portfolio
Every year in our Strategic Investor research service, we put together a series of predictions for the year ahead. These predictions aren’t about getting the price right. They’re more about getting the direction of the move right.
After all, if you have an idea of where things are going, you can profit from a trend… or avoid a disaster.
It can make a world of difference for your portfolio… it’s almost like having GPS for your portfolio.
For instance, last year, we led with a prediction about inflation. We said the Fed was between a rock and a hard place.
At the time, Fed Chairman Jerome Powell was sticking to the script that inflation was transitory. It would come back down after global supply chain issues return to normal.
We thought different. And it’s easy to see why.
The very definition of inflation is the increase in the money supply. We can see this through the M2 money supply.
After 2020, we witnessed an almost vertical takeoff in the money supply, due to COVID-related spending programs.
When you shove trillions of dollars into the system in a matter of months, it’s not hard to figure out what comes next.
First, when we print more dollars, they’re worth less than before.
Plus, an increased supply all eventually shows up in the form of rising prices. The higher the chart above goes, the more prices will rise. The faster it goes, the faster prices rise.
But last year, we didn’t just predict the move in inflation. We also forecast a rise in the price of energy.
High inflation shows up in the things we need and use everyday. And that’s truer for energy than almost anything else.
Of course, it’s because energy makes the world spin. We need it for safe shelter. We need it to make food. And we need it to power factories that make the goods we depend on to live.
Add in government policies that choked off some of our energy production… and that helped us predict higher energy prices in the year ahead.
A third prediction was a little more difficult, though: the U.S. dollar.
Predicting the value of the dollar is complicated. You have to have something to compare it to. That happens to be a basket of other currencies like the euro, the Japanese yen, and others. We measure this through the U.S. Dollar Index (DXY).
Last year, we predicted the dollar to head higher. However, the move we’ve seen in the dollar so far blew away our expectations.
Right now, the dollar is at its strongest in 20 years.
And the combination of these three predictions is a sort of triple-whammy for investors.
Falling stock prices. Companies cutting back. And dividends that are sure to suffer as profits dry up.
There’s no telling when it ends. All we know is that it will.
Until then, many investors are looking for a safe way to protect their money. In many cases, that means going to cash.
The bad news is, keeping cash in most accounts earns you nothing. Meaning, you’re losing value with idle cash that doesn’t produce any yield.
But all is not lost. You just need to know where to look.
Hiding in Plain Sight
The first step is having a roadmap in place. But taking action and getting to your destination is a different challenge altogether.
Which is why sometimes, you need to adjust on the fly. Then you can look for alternative ways to protect your hard-earned dollars.
For instance, one place many investors fail to look is government bonds.
As we’ve mentioned before in these pages, sometimes even the government accidentally does some good. One example is its I-Series savings bond.
It’s an inflation-protected bond that resets its interest rate every May and November, depending on the rate of inflation at the time.
Today, it’s paying a rate of 9.62%. That’s more than enough to beat the current rate of inflation.
It’s also exempt from state and local tax.
You can buy these bonds directly from the U.S. Treasury at TreasuryDirect.gov.
The drawback is, there are limits to the I-Series bonds. And you have to keep them for five years if you don’t want to pay a penalty. They’re more for money you don’t need quick access to.
Which is why buying short-term treasuries may actually be a great strategy today. And you can do it all through TreasuryDirect.
In fact, when yields from the government beat yields from my bank, I use treasuries as a way to park my cash until something better comes along.
Take a look at the 4-week T-bills (treasury bills). Today, they yield an annual rate of 2.7%.
Recent T-bills auction rates
That’s better than the 10-year Treasury note at 2.75%. And far better than the dividend yield on the S&P 500 of just 1.79%.
What I personally like to do with the 4-week bills is create a ladder. I set aside a specific amount of cash and break it down into different rungs of that ladder.
I like to take a lump sum, say $1,000 as an example, and break it down into four chunks. So each week in a given month, I would buy $250 worth of these notes.
Then I continue rolling that cash over until I see something better come along.
It’s a great way not just to manage your cash, but also to collect yield until you spot a better opportunity. That’s especially true in today’s environment, where it’s hard to find safety in nearly any asset.
At the end of the day, protecting your nest egg is one of the most important rules of saving. Setting a plan of when to go all-in and when to pull back helps you do that.
And when you can earn a decent return off your idle cash, that goes a long way in protecting your money.
Then, at the right time, you can easily make the switch when the next bull market rolls around.
Senior Analyst, Strategic Investor