Consumer Price Index (CPI)
At the start of 2022, the financial markets were surprised when the U.S. government’s Consumer Price Index (CPI) – the most widely used measure of inflation – rose at the fastest pace since 1982.
Inflation is the decline of a currency’s (the U.S. dollar in this case) purchasing power over time. An estimate of the rate at which the decline in purchasing power occurs can be shown in the increase of an average price level of a basket of selected goods and services in an economy over some period of time.
That’s where the Consumer Price Index comes in. So, what is it exactly and why is it so important?
What Is the Consumer Price Index?
The Consumer Price Index (CPI) is a monthly measurement of U.S. prices for household goods and services. The Bureau of Labor Statistics (BLS) computes the CPI by taking the average weighted cost of a basket of goods in a given month and dividing it by the weighted cost of the same basket the previous month. It then multiplies this percentage by 100 to get the number for the index.
The index shows how much prices have changed since the base year of 1982. The CPI was 281.1 in January 2022. That’s how much prices have increased since the base was established at roughly 100.
The basket represents the prices of a cross-section of goods and services commonly bought by urban households. This cross-section represents around 93% of the U.S. population, and it factors in a sample of 14,500 families and 80,000 consumer prices.
These are the major categories in the basket and how much each contributed to the CPI in January 2022: Housing (shelter) – 32%, Commodities (such as autos and medicine) – 21%, Food – 14%, Energy – 7%, Healthcare – 7%, Transportation – 5%, Others – 14%.
Why Is the Consumer Price Index Important?
The CPI plays a role in the lives of many Americans.
First, the CPI is tied to the adjustments made in the cost of living index. That’s important because the cost of living index determines things like annual changes in Social Security benefit amounts and how much money you can contribute to tax-advantaged retirement accounts on a yearly basis. Employers can also use cost of living adjustment data to increase wages paid to employees.
The Consumer Price Index is also important to economists as a tool for measuring how the economy as a whole is faring when it comes to inflation or, on occasion, deflation.
That is important when you’re planning how to spend or invest your money. It’s always a good idea to have a sense of which way prices are trending. That can help you better plan your budget.
The CPI is also very important because it is a key consideration for the Federal Reserve in setting its interest rate policy, which greatly influences financial markets globally.
The Fed will raise interest rates if it thinks the inflation rate is too high, to slow economic growth. By making loans more expensive, this tightens the money supply—the total amount of credit allowed into the financial system. Slowing growth and demand should put downward pressure on prices.
The longer-term risk for the Fed is falling behind in tightening (raising interest rates). Then it could be forced to play catch-up with a much bigger response – raising rates even higher than would have been needed if action was taken earlier.
How to Hedge Against Inflation
So how can you hedge against inflation?
For example, if the CPI is signaling that a period of inflation may be on the horizon, that should encourage you to make strategic moves to protect your investments. If prices are picking up, you may consider making defensive moves in your portfolio to hedge against inflation. Certain stocks, bonds and commodities or even real estate could benefit from a period of inflation.
Your search for various methods of protection against inflation can be made much easier by using Magnifi, a search-based investing platform that can help match investments to your goals. Magnifi’s AI driven system finds investment suggestions for you based on just a few inputs of your data, such as risk tolerance and investment time horizon.
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The information and data are as March 1, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Socially Responsible Investing (SRI)
What is Socially Responsible Investing (SRI)?
One of the biggest changes ever in the investment landscape has been the move in recent years to Socially Responsible Investing (SRI). While the concept may have begun in our country as an activity associated with religious societies – the Quakers not participating the slave trade – it has evolved immensely since. It is now a mainstream practice being embraced by both individuals and corporations.
Gone are the days when investors solely focused on factors such as diversification, investment income, rate of return, inflation, taxes and risks. Nowadays, socially responsible investors are going one step further. They are also choosing to factor in whether a particular investment positively impacts society.
In other words, socially responsible investment works the same way as any style of investing. But in addition to the financial returns from an investment, it also considers the investments’ impact on environmental, ethical or social change.
It enables you – the investor – to grow your money while doing good. And it allows you to invest in social causes you care about.
Why Choose Socially Responsible Investing?
Who wouldn’t want a great way to boost their assets while also making a difference? That’s what SRI does.
Socially responsible investments seek to maximize the welfare of people and their environment while earning a return on one’s investment that is consistent with your individual goals. In simple terms, the twin goals of socially responsible investing are: social impact and financial gain.
Some question whether a do-good investment strategy can perform as well as standard investing strategies. The answer is yes.
A 2020 research analysis from the asset management firm Arabesque Partners found that 80% of the reviewed studies demonstrated that sustainability practices have a positive influence on investment performance.
Several other studies have shown that SRI mutual funds can not only match traditional mutual funds in performance, but they can sometimes perform better. There is also evidence that SRI funds may be less volatile than traditional funds.
Even today, there are some that have doubts about socially responsible investing. Opponents have argued that by narrowing the field of investment options (such as avoiding weapons makers, gambling and tobacco stocks), the end result is a narrowing of investment returns.
But now, there is a growing body of evidence (in addition to the aforementioned studies) that shows the opposite is true: SRI not only makes you feel good, but it’s also good for your portfolio.
What’s the Difference Between SRI and ESG Investing?
While at first glance, both SRI and ESG (Environmental, Social and Corporate Governance) investing look at a company’s broader impact, there are some distinct differences between the two.
First off, SRI investing is not as well defined as ESG investing. SRI is more subjective and based on an individual’s view of the world – political views, what is right and wrong, and what is ethical, etc.
In contrast, ESG investments are measured by and scored on specific environmental, social and governance metrics. More specifically, ESG investing looks at specific factors, such as a company’s best practices when it comes to pollution or women’s rights.
SRI, on the other hand, takes these factors into account and blends them with an investor’s personal values.
Bottom line: SRI involves screening investments to exclude businesses that conflict with the investor’s values. While ESG investing focuses on companies making an active effort to either limit their negative societal impact or deliver benefits to society (or both).
How to Participate in Socially Responsible Investing?
You have a number of options available to you if you want to invest in good causes. You can make socially responsible investments via individual stocks. However, the better (and safer) bet is to do so through socially conscious mutual funds and exchange-traded funds (ETFs). A simple search on Magnifi indicates numerous ways for investors to access SRI funds with low fees.
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The information and data are as of the May 28, 2020 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Global Investing
Global Investing
U.S. investors tend to stay close to home, prioritizing domestic stocks and funds. But non-U.S. markets comprise 57% of global investment opportunities, which means that close to half of those opportunities exist beyond U.S. borders. Some of the world’s largest technology, energy, and financial companies are international, such as Samsung in South Korea, Mitsubishi in Japan, ING in the Netherlands, and Allianz in Germany.
What Is Global Investing?
For many investors in the U.S., going “global” means investing in European companies. But this is a limited — and limiting — view of global investing. There is plenty of energy in non-U.S. and non-European markets around the world, from Southeast Asia to South America to Africa and beyond.
Global investing means taking all of the markets around the world into consideration and putting some of your investment dollars in stocks and funds outside of the U.S. and Europe.
Global Fund vs. International Funds
In the world of investing, “global” and “international” are not interchangeable terms the way they are in other contexts. Global funds and international funds are distinct, with different rules, goals, and opportunities.
Global funds are comprised of securities from around the world, including the investor’s home country. Global funds give investors the chance to diversify and reduce country-specific risk while still including their own country in their investment portfolio.
International funds, on the other hand, contain securities from around the world with the exception of the investor’s home country. These funds are a way for investors who already have a robust domestic portfolio to diversify outside that sphere.
Why Invest Globally?
Investing globally — and for U.S. investors, specifically beyond the U.S. and Europe — is an effective way to reduce risk in a portfolio and also opens up the door to investing in all sorts of opportunities that don’t exist in one’s home country.
As we pull out of the acute phase of the coronavirus pandemic, the economies of emerging-market and developing economies are projected to grow faster than the United States. These countries are on track to be the largest contributors to global GDP by 2042, and by 2050 will account for almost 60% of the world economy.
Accordingly, developed and emerging markets are beating the S&P 500 so far this year, with China, South Korea, and Japan showing strongest growth. In fact, some analysts are predicting that foreign equities might outperform U.S. stocks as a whole in 2021.
The growth of global funds in particular is a huge opportunity for investors. PwC predicts that global assets under management will reach $145.4 trillion by 2025, almost double the $84.9 trillion that was under management in 2016.
Investors who overlook these opportunities are limiting their ability to diversify, which increases risk in their portfolios. Owning a globally diversified portfolio protects investors against seeing serious losses when stocks in one country suffer setbacks that aren’t felt elsewhere.
Overlooking global investments also causes investors to miss out on some phenomenal investment options. There are exciting things unfolding in business around the world — in Brazil and China and Eastern Europe, for example — and U.S. investors who aren’t tapped into global options will lose a chance to capitalize on that energy.
How to Invest Globally
While global investments are unlikely to make up a majority of a U.S. investor’s portfolio, it’s a good idea to target a sizable chunk of assets to invest overseas. According to Christine Benz, Morningstar’s director of personal finance, professionally managed asset allocations typically target 25-33% of the portfolio in overseas investments. This can be a good benchmark for individual investors to look to.
Investors can add global investments to their portfolios by buying stocks or exchange-traded funds (ETFs).
Stocks
There are a number of ways to invest in foreign stocks. U.S. depositary banks issue American Depository Receipts (ADRs) that attest to a right to ownership of a share or fraction of stock of a foreign company that trades in U.S. markets. U.S. Investors usually find it more convenient to own the ADR instead of the share of foreign stock itself. Alternately, depositary banks in an international market, usually in Europe, issue Global Depository Receipts (GDRs) that attest to ownership of shares in a non-U.S. company. GDRs are available to institutional investors in and outside the U.S.
Some investors may find it advantageous to invest directly in the stocks or bonds of foreign entities, perhaps with an eye toward acquiring a decisive stake in a company. This is not a good strategy for the casual investor, as there are many complex factors involved in these transactions, such as tariffs and trade barriers.
Exchange-traded funds (ETFs)
ETFs group many different stocks or bonds — sometimes thousands — into a single fund that is traded on the stock exchange like an individual stock. These funds can focus on global stocks and sometimes have a regional focus. Individual investors are not allowed to buy mutual funds that are based outside their home country, so investors should buy a fund based in their own country that includes global investments.
4 Ideas to Remember About Global Investing
Global investing is a good strategy for those who want to reduce their risk, open themselves up to exciting new opportunities, and become more sophisticated in their investing approach. Here are four important ideas to remember when considering global investing:
- U.S. investors should look beyond Europe to truly diversify their investing globally. Great opportunities exist in regions all over the world.
- Global investing allows you to diversify your money and mitigate your risk so that when stocks in a given country take a hit, your portfolio stays strong.
- Being open to investing beyond the U.S. and Europe opens up many phenomenal investment opportunities that you may have not known existed.
- Global funds are a fast-growing and potentially lucrative investment opportunity.
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The information and data are as of the June 17, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Millennials
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There are 75.4 million Millennials in the US, making them the largest living generation and the largest generation in the labor force. But who are they?
The strict definition of a Millennial is someone who was born between 1981 and 1996. They were raised with technology (using computers as early as grade school) so it’s no surprise that they are tech-savvy; they are efficient, valuing work-life balance and time with their families; and they are achievement oriented and they want to make a difference beyond their workday.
When it comes to buying, they care about more than the price— they care about a company’s core values. That’s important because Millennials are responsible for $1.4 trillion in annual buying power. Just like Millennials have different professional priorities and personal goals than their parents did, they spend their money differently.
What Is the Millennial market?
Millennials have a reputation for being broke. That’s kind of true.
American Millennials are financially behind compared to Generation X and Baby Boomer generations for a few reasons. These include student debt, a higher cost of living, and the financial crisis that limited well-paying jobs upon graduation.
Nonetheless, Millennials are educated.
39 percent of Millennials have a bachelor’s degree or higher. But, while Millennials tend to have more education than their grandparents, they have loans to show for it. In 2019, student-loan debt reached $1.5 trillion, with the graduating class of 2018 owing an average of $29,800.
While that kind of education debt is a burden, no doubt, an education makes a difference in Millennial earning power.
According to the Pew Research Center, in 2018, Millennials who had earned a bachelor’s degree earned $56,000 on average. That is a stark contrast to Millennials with only some college education who reported earning nearly $20,000 less on average. For many, that’s the difference of being able to afford a house, a family, and other milestone expenses.
Millennials aren’t just strapped by debt. The incomes offered by available jobs haven’t kept up with the cost of living. While there has been a 67 percent growth in income, according to Student Loan Hero, it isn’t keeping pace with the cost of living.
Nonetheless, Millennials are spending, and spending differently. Just like they want more out of their work than hours logged, they want more out of their spending than a good deal.
Why Invest in the Millennial Market?
Millennials are more interested than ever about what they are consuming. From food, to cosmetics, to cleaning supplies— a Millennial might naturally ask, what’s in it? Approximately 41 percent of Americans intentionally seek out products with the clean label designation. Nearly half of these 41 percent are under the age of 35.
This is particularly true for food products. Millennials tend to have an interest in eating fresher and more naturally. Case in point: Millennials are the largest group of organic shoppers. This trend is particularly true for Millennials who have children.
If you consider that farm-to-table products and convenience meet harmoniously in many meal kit delivery boxes, you then won’t be surprised to learn that Millennials are also more likely than any other demographic to order meal kit services.
Millennials also like to eat out, less at places like McDonalds and more for new and unique experiences. According to the 2018 US Consumer Expenditure Survey from the US Department of Labor, Millennials spent 47 percent of their food budget on food away from home, more than all other groups. Even before the pandemic, 67 percent of millennials were more likely to choose a restaurant that delivered.
When it comes to food and drink, higher quality overrides price. (One study even finds that Millennials spend more on craft beer than their cell phone and utility bills!)
In the same way Millennials want to know more about what’s in their food, they want to know more about, well…everything they do, and why. Often, they do this on their phones. 96 percent of Americans under age 29 own a smartphone, according to the Pew Research Center. In the past year, 64 percent of Millennials paid to download at least one app, and approximately 20 percent of those sought to purchase an app monthly. They are willing to share their information (in safe and secure digital platforms) in order to use innovative and convenient services like Uber, Lyft, and Airbnb; meal delivery platforms like GrubHub; subscription services and more.
They also do a lot of online shopping from their phones. According to one study, 35 percent of Millennials reported that they can’t live without Amazon, only to be followed by Gmail (30 percent) and Facebook (29 percent).
Millennials are leading the adoption of wearable technology that tracks trends and gives feedback. (Millennials love feedback!) In other words, they are trying to do things a bit smarter than they could without the data tech offers.
Beyond eating better and self-improvement, Millennials have taken their videogame habits into adulthood. Millennials grew up with videogames, and so it should be no surprise that two in three Millennials in the US play video games every month.
They also like watching other people play video games— driving the eSports industry. According to the Entertainment Software Association, the average gamer is 34 years old — or, a Millennial. In 2020, the global video gaming industry saw $180 billion in spending, topping sports and movies globally.
When it comes to work, even before the pandemic, Millennials liked working from home. They like flexibility and efficiency, and they are tech-savvy enough to avoid the need for a printer and opt for document sharing on the cloud, instead.
Millennials might be at a disadvantage financially, but they shouldn’t be discounted. They are willing to spend more on better quality, rather than seek out the best deal. As they do things in more data-driven ways, they will lead the adoption of the next wave of technologies.
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The information and data are as of the March 23, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.
