Are You ready for 'That 70's Show'?
Do you remember the 70's? No, I'm not talking about flared pants, or tie-dyed shirts, or disco and the Bee Gees, but something altogether more sinister: inflation! In the 70's and early 80's, inflation surprised nearly everyone, roaring up to double-digit levels, and stubbornly remaining there for years before finally being subdued with cripplingly-high interest rates. A dollar in 1970 was 'worth' only 35 cents by 1983. That's a 65% loss!

Inflation is probably the greatest of all enemies of investment performance. Why do I say this? Because it does the exact opposite of what you want an investment to do. If the ultimate virtue of investing is compound growth, then the ultimate vice must be compounded negative growth, and that is exactly what inflation is, compound negative growth in real terms. In a prolonged inflationary environment, the value of many investments diminishes each and every year. Inflation favours the spender and the borrower, rather than the saver, the lender, and, most importantly, - the investor! And there's typically a double whammy, whereby inflation causes the value of stocks and bonds to fall, even while the cost of living rises.. It's the ultimate indignity!

But why bother about inflation now? Isn't inflation low, and under control? Well, inflation IS low right now. Nobody is really too concerned about it. But there are some worrying signs. Commodity prices are rising, and have been for several years. Take a look at the chart of the CRB Commodities Price Index. Eventually, higher commodity prices tend to feed into higher inflation. The economy is beginning to pick up steam too, and too much growth can also lead to inflation.


Source: Commodity Research Bureau

But even if inflation starts to pick up, won't the central bank just raise interest rates a bit, to put an end to it? Well, in the 70's, it took more than a few percentage point increases in interest rates before inflation was killed. It took wage and price controls, the Anti-Inflation Board, and interest rates over 15%. The fact is, no-one knows what it will take to tame inflation once it gets started.

Now, I want to be clear about one thing: I am not forecasting that inflation is going to come roaring back, but neither am I dismissing the idea out of hand either. It could happen. Everyone who owns a house buys house insurance, not because they expect a fire, but because a fire could happen. Well, inflation is like a financial fire. If it comes back, I know that most investors are woefully unprepared for it. For retirees on a fixed income, it can be particularly devastating.

What is needed is something that provides inflation insurance. There are several investments traditionally touted as inflation hedges, but none of them is guaranteed to do the job. Sometimes gold protects against inflation, and sometimes it doesn't. Real estate prices might go up, but so too might the cost of borrowing.

Fortunately, several years ago, a new type of investment was introduced to the Canadian market , called Real Return Bonds. They are issued and guaranteed by the Government of Canada, and guarantee the holder a return, over and above inflation. They are ideally suited for inclusion in an RRSP, RIF, or LIF. There really is no comparable investment available today, and I feel that they should represent a substantial part of your portfolio at all times. Yet few investors own them.

There are several ways to invest in Real Return Bonds. Call me today to learn more about how you can own them in your portfolio. Here at Manulife Securities Incorporated Securities Inc (Member CIPF), I can provide you with access to Real Return Bonds, as well as other bonds, stocks, mutual funds, GICs, and other investments. I have over 15 years experience in the financial services industry, both in Canada, and overseas in Singapore and London. Protect your capital from inflation today, BEFORE inflation occurs.

Sincerely,

Scott Swallow, HBA, MBA, CIM