Every day I sit with Caliber’s clients and every day they ask me about “return on investment”. They ask me about “internal rate of return”. Most often, they want to know about “capital preservation”.
Clearly when considering an investment all of these topics are incredibly important. The hidden component to maximizing results in these areas is inflation. How does inflation of 7% effect the return on investment on a fixed rate note at 14% interest? Simply put, it cuts the ROI in half. How does 7% inflation effect capital preservation in a mixed portfolio of equities and bonds? Simply put, it nearly guarantees losses of investment capital.
“In an article in the 2012 Credit Suisse Global Investment Returns Yearbook, they found that during periods of “marked” inflation, equities easily outperform bonds, probably the worst investment to own during inflationary episodes. Yet equities gave a real return of -12% during those periods, while bonds lost -23.2%. Double ouch.”
How does inflation effect an income producing hard asset, such as an apartment complex, with fixed rate long term debt attached to it? Simply put, it INCREASES returns.
Caliber’s clients know the secret to winning the investment game – when looking at ROI, it is important to look at inflation adjustments, tax effect, leveraged returns, etc.
In the past 5 years, the federal government (for better or for worse) has printed an astronomical amount of dollars that have since bled into the monetary system. Because of this, inflation is essentially guaranteed to occur and will likely occur at a high rate.
Let’s talk if it is time for you to get serious about how you are going to prepare for this unstoppable event.
Managing Partner, Caliber