LAST CALL FOR JUNE
Pre-order my book, Real Wealth, this month, tell me you did at tylergardner.com/book, and I’ll send you a three-part exclusive audio series delivered digitally in early July:
Episode 1: Why it took two bottles of wine, a napkin, and a full actuarial breakdown of my 78-year-old father’s net worth to convince him to buy the car he’d wanted his entire life…and why that still wasn’t enough.
Episode 2: What I learned from buying Peloton at the IPO and selling near the top, including why getting lucky twice is the most dangerous thing that can happen to an investor.
Episode 3: How I became, briefly and without commission, the Jordan Belfort of the cannabis stock craze.
Pre-order now and you’re locked in for every monthly incentive through December 1st.
Greetings,
U.S. inflation hit 4.2% in May (third consecutive month of acceleration) and I mention this not to ruin a perfectly good Monday morning but because it’s a useful reminder that every now and again, your money can lose its purchasing power.
For our 1.0 readers, there are two numbers that dominate the inflation conversation: the Consumer Price Index (CPI), currently at 4.2%, and the Federal Reserve’s preferred gauge, the Personal Consumption Expenditures index (PCE), at 4.1%. The CPI is the dramatic one, as it’s heavily influenced by energy prices, which means it swings around every time something happens in the Middle East or a refinery sneezes. The PCE is calmer, broader, and adjusts for the fact that when steak gets expensive, people buy chicken.
The Fed watches the PCE. The news watches the CPI. This explains just about all you need to know about both institutions.
The practical implications for your money are straightforward:
Money you need soon has one job: don’t let inflation eat it. A high-yield savings account, money market fund, or TIPS will do the work. The goal is not to get rich. The goal is to appreciate that your money is keeping up with the headlines.
Money you don’t need soon has a more ambitious assignment. At 3% average inflation, your purchasing power is cut in half in 24 years: retire at 65, live to 90, and day-one dollar is worth fifty cents at the end. This is why we own equities, why we take risk, and why today’s portfolios are built around the three asset classes with the strongest academic support for outrunning inflation: equities, real assets, and TIPS.
So in an attempt to assuage our long term concerns about monthly inflation data, and to give you something more constructive to do than watch CNBC, where inflation is apparently always either the end of civilization or a buying opportunity, depending on which twelve-minute segment you catch, here are three portfolios that will offset and tend to outpace inflation.
Portfolio One: The Burton Malkiel Special
Allocation: 90% Stocks / 10% TIPS
This isn’t my idea. It’s Burton Malkiel’s. Princeton economist, A Random Walk Down Wall Street, two million copies sold, fifty years of being right before being right was popular. His preferred portfolio is overwhelmingly stocks for risk-on with TIPS as the risk-off component. Not bonds. TIPS. Know thy fixed income.
Stocks (90%): VTI or FSKAX. US total market, already far more global than it sounds, as the companies inside generate roughly 40% of revenues internationally. You’re owning the most competitively dominant multinationals on the planet, who happen to be headquartered here.
TIPS (10%): Treasury Inflation-Protected Securities. These are government bonds whose principal adjusts upward with inflation. Buy a $1,000 TIPS bond, inflation runs 4%, your principal becomes $1,040. You’re not buying these for explosive returns. You’re buying purchasing power preservation backed by the US government. TreasuryDirect.gov for direct ownership, or VTIP/SCHP as ETFs at 0.04-0.05% expense ratios.
This portfolio’s historical real return: 6-7.5% annually after inflation. The financial industry will tell you this is dangerously simple. Their alternative comes with a much larger expense ratio, a risk disclosure that runs forty pages, and a long/short equity strategy that absolutely crushed it from 2019 to 2021 and has been “repositioning” ever since.
Portfolio Two: Add A Slice of Real Estate
Allocation: 75% Stocks / 10% TIPS / 15% Real Estate
Real estate is one of the things inflation is literally measuring. When prices rise, property values and rents rise with them.
REITs (VNQ, SCHH) give you diversified real estate exposure without tenants, toilets, or 2am phone calls. And if you are interested in direct ownership: a $400,000 property with $80,000 down appreciating 4% returns $16,000 on your actual cash, a 20% real return. And your fixed-rate mortgage gets repaid in increasingly cheaper dollars as inflation runs. The bank lent you dollars worth X. You’re repaying in dollars worth 0.85X. Inflation erodes your debt. This is precisely why I don’t pay down my own 3.25% mortgage. And yes, this is the silver lining of inflation: your fixed debt gets cheaper.
Portfolio Three: Add Infrastructure*
Allocation: 65% Stocks / 10% TIPS / 15% Real Estate / 10% Infrastructure
Infrastructure—toll roads, utilities, pipelines, cell towers—has revenues that are frequently contractually linked to inflation. Not “probably keeps up.” Legally required to keep up. That’s a different category of protection entirely.
IFRA, VPU, or IGF for global exposure. But Tyler, why not commodities? Gold doesn’t pay a dividend. Oil doesn’t compound. Infrastructure produces cash flows. Cash flows compound. Compounding is my favorite word in the English language, and that’s saying something when salsa exists.
*Note: this type of portfolio is too “active” of a bet for my taste.
3 Mistakes to Avoid
Too many bonds. Long-duration bonds are an inflation victim, not an inflation hedge. The 2022 bond market dropped 13%, its worst year since the 1970s, while inflation was running hot. Use TIPS for long-term risk-off, money market for short-term buffer.
Too much cash. At 3% inflation, cash loses a quarter of its purchasing power per decade. The right role for cash is operational: 1-2 years of living expenses in a money market as a liquidity buffer.
Over-tinkering. Pick the portfolio that matches your situation. Rebalance once a year. Leave it alone.
And if you want the full breakdown of each portfolio, check out this week’s episode of Your Money Guide on the Side. If you find the show useful, a review helps more than you’d think—it’s how new listeners find the show, and how I know I’m not just speaking into the endless void of personal finance podcasts.
Listen to This Week's Full Episode
Two Things I’m Currently Thinking About
1. The God You Didn’t Choose. Yep, we’re going deep today. In 2005, David Foster Wallace gave a commencement address at Kenyon College that distills his worldview into twenty-two accessible minutes (which, for context, is roughly the time it takes to read the first footnote of Infinite Jest and decide you’re more of a podcast person).
His central argument: everybody worships something. The question is never whether you have a god. It’s which one you’ve chosen, consciously or, more often, by default. Money. Beauty. Power. Intellect. And the insidious thing about default gods is that you never examine them. You just inherit them, nod along, and call it ambition.
I taught at New England prep schools before I got tired of snowplow parents who wouldn’t let their kids near adversity. The kind of place that mentioned its Ivy League placement rate the way Silicon Valley companies mention their kombucha on tap and bring-your-dog-to-work Thursdays, as though the amenity were the point, and not a very expensive distraction from whether any of it means anything. My students didn’t worship God, exactly. They worshipped the myth of Harvard, or the “Ivy” gods…the idea that if they could just get “there” (preferably in the form of HPY), their anxiety would finally resolve itself into something resembling peace. That Harvard was the finish line and not, as it turns out, just another starting point populated by humans who also can’t sleep at night.
2. The Green God. Rainn Wilson (yes, the Dwight Schrute) has been saying something similar lately about what he calls a crisis of meaning. At the height of his fame on The Office, making more money than he’d ever imagined and playing one of the truly unique and exceptional characters in television history, he was at his most depressed. The green god had delivered exactly what it promised, and it turned out the promise was the problem.
The most unexamined belief system in American life is that net worth and self-worth are the same number. They are not. I know this because I now talk about money for a living and I have met a genuinely alarming number of wealthy people (like, fly a private jet to Japan on a moment’s notice for a quick bite at Sézanne type of wealth) who are completely miserable, and an equally alarming number of people with very little who are not.
The work, and Wallace and Wilson would both agree, is figuring out what you actually believe in before the belief chooses you. That’s harder than getting into Harvard. It’s harder than hitting your number. It’s also, I’d argue, the only thing worth doing.
And Before You Go…
This week’s newsletter is brought to you by Gelt.
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The moves that actually reduce your tax bill don’t happen in March. They happen now. PTE elections. S-corp timing. K-1 cleanup. Prior-year retirement contributions. Real tax strategy takes months to implement and summer is exactly when the smart decisions get made. By January the year is already over.
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As always, hope this gives you something to think about throughout the week ahead.
—Tyler
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