#20 – Does Your Investment Portfolio Have Termites? from Jason Hartman
In this article by Mark MacVay for http://JasonHartman.com, you will see exactly how inflation acts like a termite on your investments, and how to use the power of inflation to create wealth instead. http://CreatingWealthPodcast.com
Do your investments have termites? It may sound like an odd question. But if you’re like many Americans with the typical savings accounts and mutual fund/stock portfolios, then you are subjecting yourself to the ravages of a specific type of termite which is slowly, and clandestinely devouring away at your financial portfolio, taking away the prospects of a secure retirement with it.
What type of termite could do such a dastardly thing, you ask? This termite is called inflation and it is both the scourge of financial security and the product of our current monetary system.
Allow me to explain. Most of us have been brought up to believe that saving and investing are good and getting into debt is bad. While I certainly agree with this general sentiment, it contains one important fallacy – it presumes that the money supply in our economy is static. The reality could not be further from the truth; the money supply is increasing at an ever-faster pace. You see, every dollar added into the economy cheapens those already in existence, and the Federal Reserve in conjunction with the government are increasing the supply of dollars and credit at an alarming rate. This means that your savings and portfolio accounts are being reduced in value as the dollars they convert into buy progressively less and less. Sadly, this termite assault on your wealth is ongoing and relentless.
But, you ask, I heard on the radio that inflation was under control, that the CPI (Consumer Price Index) was relatively low… what gives? Suffice it to say that the CPI is sufficiently manipulated by the government to give the public a much more benign view of inflation than actually exists. To see just how ravaging this inflation termite is, simply look around you – oil, commodities, health care, education, housing, food and now even postage have been going up substantially in the last few years. These increases far eclipse the relatively modest gains in the stock market over the same time period.
Now, at this point, I presume you’re scratching your head and asking… well, how do I eliminate this termite? How can I secure my financial house from this destructive insect? The truth is that there is no Orkin man, no Terminix for this type of pest – that would require a major overhaul of our monetary system. Alas, we are stuck with this troublesome termite for the foreseeable future.
However – and this is where it gets interesting – while you can’t eliminate this pestilence, you can use it to your own advantage to maintain and grow your wealth rather than have your wealth eaten away. How, you say? By properly turning the tables on our financial system and becoming a debtor.
Heretical, no? If you recoiled in disgust, I understand as it runs counter to the way many of us have been brought up. But allow me to elaborate. By debt, of course, I don’t mean going out and indulging yourself on fancy meals, cars and vacations. There is no long-term benefit of purchasing those items using debt. In contrast, by selectively purchasing tangible assets which throw off cash flow, and by buying these assets with the bank’s dollars in the form of a mortgage/loan, you achieve the financial equivalent of a double play. Long term, your asset most likely increases in price as more and more dollars flood the economy, and, just as importantly, you are paying for that asset year after year in progressively worthless dollars thanks to the inflation termite eating away at the dollars you’re now repaying to the bank. Not only is this a shining example of leverage, it can also be thought of as a form of financial martial arts – you are harnessing the energy of your opponent (inflation) and using it against him.
Of course, one of the best asset classes with which to follow this path is investment real estate, a proven path to wealth for many and a good hedge against inflation. In the interim, your tenant helps pay your debt obligations while you allow the aforementioned economic forces to work their magic. Of course, you have to do your due diligence and choose your properties and loans carefully. Nevertheless, this is a powerful technique to build long-term financial wealth.
How ironic that the best defense against the termite of inflation is an investment property with a big mortgage!
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