How to Build an Inflation-Proof Portfolio (And 3 Mistakes to Avoid)

Tyler Gardner (0:00)

The best portfolio for fighting inflation is not the one that reacts most cleverly to inflation signals. It's the one that compounds over the longest period with the fewest interruptions to its own growth.

Hello, friends. This is Tyler Gardner, welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be.

Quick note before we get into it, June's pre-order incentive for my book, Real Wealth, is the most personal thing I've ever agreed to share. Pre-order in June and submit your receipt at tylergardner.com and you'll get an exclusive three episode audio series that will never appear on this feed. Three pivotal moments in my own financial life. The humbling one, the embarrassing one, and the one that made me rethink everything. Three episodes, three moments, tylergardner.com, pre-order, submit your receipt, get the episodes delivered digitally in early July and receive every additional monthly incentive between now and the book's release on December 1st. And now, on to today's episode. I have a simple rule about the content of this show. If a word appears on the news more than three times in a single segment, I try to wait at least six months before touching it. I've been waiting. The clock ran out, so today we're going to address it full on. Inflation.

Inflation is, at its core, a very simple concept dressed up in very complicated language so that economists have something to do at conferences and pundits have something to worry you about on Monday morning news cycles. Here is what it actually is. The dollar you have today buys less stuff on average tomorrow. Not usually dramatically less. We're not talking Weimar Republic or wheelbarrows full of cash. We're talking about the slow, steady, unspectacular erosion of purchasing power that compounds over decades until you look up and realize that the house your parents bought for $40,000 in 1978 is now worth $600,000. And a cup of coffee at the airport now costs $8.50. And somehow both of these facts are true simultaneously.

Over the last century, US inflation has averaged roughly 3% per year. That sounds manageable, and for the most part, it is, until we run some numbers that I want you to think about today.

At 3% annual inflation, your purchasing power, just meaning what you can get in the future for that same $1 bill, is cut in half in about 24 years. So if you retire at 65 and live to be 90, which a meaningful percentage of you will, your $1 in retirement year 1 is worth 50 cents by the end of your retirement. And I feel like that's a pretty useful starting point for you heading into this next chapter of your life. Because your portfolio has to outrun that every year for decades, even while you're sleeping, preferably in a lazy boy chair while watching reruns of The Price is Right. That is what today's episode is about. We're going to build 3 portfolios, going from simple to slightly more complex, that are specifically designed to tackle inflation. And then we're going to cover 3 mistakes that investors make that work directly against them in an inflationary environment. Mistakes that are extremely common, but extremely easy to avoid. And before we get into it, a familiar ask if you have found this show even remotely useful, if it has saved you money, clarified something confusing, made you feel slightly less like you're wandering through a financial hall of mirrors, would you consider leaving a review on Apple Podcasts or Spotify? Takes about 45 seconds, costs you nothing, and it is genuinely the highest leverage thing you can do to help this show reach people who need it. Thank you in advance. And now, let's figure out together how to build the perfect portfolio to protect you against the damaging effects of inflation.

Part 1

The Foundation. Why Most Portfolios Fail at Inflation.

Before we build anything, I want to explain why the standard balanced portfolio that the financial industry has been selling for decades is actually a fairly mediocre inflation fighting tool. The classic 60-40, 60% stocks, 40% bonds, has a well-documented problem in inflationary environments. Bonds, particularly long-duration bonds, get absolutely punished when inflation rises. And here's why, in one sentence. Inflation erodes the value of the fixed payments a bond makes. And when inflation expectations rise, interest rates tend to rise to slow down the borrowing of additional capital. And when interest rates rise, existing bond prices fall, because who the heck wants to pay a thousand bucks for my bond earning 3% if they can go pay a thousand bucks for a bond earning 4%?