Disruptions to the economy can manifest in many ways. The current predicament in the American economy, and countries across the globe, is the persistent rise of inflation.
Learn what you need to know about inflation, how it affects your family office investments, and how you can endure its adverse effects on your finances with Christina.
What Are Family Offices?
Over the past decade, family offices have grown increasingly popular amongst investors. For those who invest through a family office, a complete understanding of what exactly family office investing is provides you with the insight to recognize how this financial avenue can adapt to rising inflation.
Family offices are a loose categorization of investment firms that work on behalf of an ultimate principal at an intimate level. These offices have a close working relationship with the folks who invest their money.
As their name suggests, family offices serve discrete family units: the principals, their children, grandchildren, and perhaps their extended family.
A wide range of financial entities technically qualify as family offices. Family offices generally consist of a tight network of professionals, sometimes a lone advisor working one-on-one on behalf of their principal.
What Is Inflation?
To gain a firm solution to a problem, we must first have a complete understanding of the problem. To begin with: what is inflation exactly? The better your knowledge of inflation, the better equipped you are to avoid its pitfalls and succeed where there is opportunity.
Inflation is an uncontrollable rise in the prices of goods or services in a given sector or sector of the economy. More specifically, inflation describes the rate at which this price rise occurs.
However, at its core, inflation describes the weakening of the dollar’s purchasing power. Rising prices are a symptom of a deeper problem: the dollar’s value is growing weaker.
A weakening dollar generates a general, economy-wide rise in prices; as the dollar becomes weaker, goods and services become more expensive.
What Causes Inflation?
Though it is a well-known economic phenomenon, the root causes that drive inflation remain unclear. As a profoundly complex system, the forces that move the economy are equally complicated.
The leading theory on the primary causes behind inflation revolves around the money supply in the economy. The more printed money circulating in the economy, the less valuable it is.
If every person in a town were suddenly given a million dollars, it is highly likely they would buy more goods and services. With more money, people can increase their procurement of goods and services in the market, even though the supply has remained the same.
However, this increased competition for the unchanged supply of goods and services would drive up their prices; inflation explodes, driving up the cost of goods and services at an unsustainable rate.
How Does Inflation Affect Your Finances?
General inflation has profound and disparate effects on the economy. On the whole, an accelerated rate of increase in the prices of goods and services indicates a grim future for the economy and an individual’s finances.
What’s more, the underlying issue, the weakening of the dollar’s purchasing power, has deeply insidious effects on your financial health. However, there are a few silver linings to this economic phenomenon, depending on the strength of your investments.
Here are three key ways inflation affects the economy:
- Rising prices of goods and services
- Weakening of savings and retirement funds
- Increased performance of real estate assets
Rising Prices In Goods, Services
Sector-wide increases in goods and services are extensive. Staple commodities like utilities, groceries, medicine, and gas can grow increasingly out of reach to folks who cannot afford the steep price rise.
The rise in prices across the economy has a cascading effect on the stock market. Consumers are less compelled to invest in the stock market as rising prices strain their finances.
With decreased participation in the exchange, share prices decrease, and the stock market takes a downturn, making it a volatile investment.
Weakening of Savings and Retirement Funds
As the dollar’s purchasing power decreases, the value of your savings deteriorates. The strength of a savings account is that money locked away for retirement grows over time due to interest generated.
Ballooning inflation penetrates retirement funds when the dollar decreases to the extent that it exceeds interest.
In effect, your retirement savings dwindle as the value of the dollar grows weaker and weaker. Inflation at its worst can wreak havoc on your savings, putting your long-term retirement plan at serious risk.
Increased Performance of Real Estate Investments
Real estate is one of the few areas where inflation positively affects the market. Rising prices caused by endemic inflation are not limited to one economic sector. Therefore, real estate prices grow higher as inflation continues.
While rising prices in the real estate market may discourage people from buying new homes, property owners benefit as their property values grow rapidly.
Furthermore, real estate investment opportunities like rental properties absorb the rising prices of operating expenses by factoring those costs into rent. Rent, like many other goods and services, rises in price, thereby netting property owners an increased return the higher they go.
Real estate provides investors with a hedge against inflation. While inflation wreaks havoc on your family office investments and savings, your recourse to enduring its adverse effects is diversifying your portfolio with reliable, high-value real estate assets.
What Does Inflation Mean for Your Family Office Investments?
How inflation affects your family office’s investments depends on the AUM at the core of your investment strategy. Runaway inflation will have devastating effects on unbalanced portfolios.
Securities investments are likely to winnow as inflation gets worse; the cascading effects of less consumer participation in the stock exchange can damage everything for 401ks to ROTH IRAs and Index Funds.
Because retirement funds are dangerously susceptible to inflation, your family office investments must go towards investment opportunities that won’t be compromised by inflation.
The best place for investors to turn during inflationary periods is real estate. Inflation can strengthen your investments if you have the right real estate assets.
What Makes Real Estate Different?
Real estate benefits from distinctive advantages because it has unique properties that set it apart from other asset classes, like securities or bonds. These unique properties of real estate assets play a significant role in their ability to endure and overcome the adverse effects of inflation:
- Scarcity
- Improvability
- Permanence of Investment
- Location
Scarcity
Real estate’s inherent scarcity establishes a strong baseline value that can adapt to shifting market trends caused by inflation. Supply and demand are some of the fundamental laws of economics. High supply and low demand create low value; low supply and high demand create high value. Housing garners a sustainable, constant demand — people will always need a place to live.
Supply of property rarely exceeds demand. Countries worldwide continue to struggle with deep-rooted housing crises, primarily due to the inherent scarcity of real estate. Land is a finite asset.
The total supply of new land diminishes for every plot of land zoned, developed, and sold. Furthermore, development is a time-consuming, costly process, so the development of new housing units occurs at a slow pace.
Between the finite supply of land and the slow pace of development, real estate is scarcity prone. The scarcity of property in the face of sustained demand sets a consistent value for real estate that keeps it stable during turbulent economic periods.
Improvability
Real estate can endure against outside market trends because of its improbability. Conventional capital assets, like stocks and bonds, don’t allow investors to take an active role in their value.
When you acquire a share of a company, its value is determined exclusively by market forces outside your control.
Real estate is different. As physical real property, real estate can be altered by raising its value. Improvements in a given property can drastically affect its value.
From minor improvements like new kitchen cabinets to complete overhauls of the house, the improbability of real estate allows investors to take a more significant role in the value of their assets.
With more control over the value of their real estate assets, property owners have the agency to eschew the effects of inflation.
Permanence of Investment
In an out-of-control inflationary period, stability is the definitive attribute you want out of your assets. Real estate assets introduce stability to your portfolio by their fixity: the permanence of capital investments in an asset.
Fixity describes the permanent integration of capital into an asset; when you infuse more capital into an asset with an investment, that capital remains fixed, setting a new value baseline.
Real estate has strong fixity because physical property can hold the value of capital investments. Foundational property investments on its electrical wiring, plumbing, and so on suffuse the asset with a permanent infusion of capital that keeps its value high, no matter what happens in the economy.
Location
Perhaps the most distinctive characteristic of real estate is the profound role location plays in determining its value. Stocks find strength in the fact that each share holds the same value. However, when the market worsens, those shares all decrease in value equally.
Real estate is unique because two identical properties can have vastly different values based purely on their location. Because value has such high degrees of variability based on location, investors have the opportunity to be more selective for better returns.
The difference between a high-performing location and one that is less can make all the difference in the strength of your return. When the economy weakens, selective investments in real estate based on location can determine the success or failure of your portfolio.
Where Should You Invest for the Best Real Estate?
Including real estate in your family office investment strategy is crucial to enduring and counteracting the effects of inflation. For investors interested in getting into real estate, finding the right market can be tricky — where you invest makes all the difference.
Few markets have the strength of the Los Angeles real estate market, specifically the Westside region.
As the largest city on the West coast, Los Angeles has been at the epicenter of a century-long migration to the sunny skies, the vibrant culture, and the economic opportunity California offers.
As a result, the Los Angeles real estate market has remained one of the most competitive and lucrative in the country for decade after decade.
Blue chip, premium real estate assets have the growth potential and stability to sustain your portfolio through the worst inflation has to offer.
Investing in Westside properties in Santa Monica, Venice, the Pacific Palisades, and elsewhere is the hedge against inflation you need to keep your finances safe.
Invest With Expertise
Christina has thrived in the Westside real estate market for over four decades. Our team has adapted and succeeded through good times and bad by building a robust portfolio that can weather every market condition.
Invest with Christina and connect with the best real estate Los Angeles offers. Get started today and protect your finances from inflation tomorrow.
Sources:
Inflation Leaves Consumers Growing More Gloomy In October | U.S. News