Rising with the tide: How to use passive franchise investing to hedge against inflation
Benjamin Franklin once said that nothing is certain in life except death and taxes – but if he lived today, he would most certainly add “inflation” to the list. For most developed capitalist economies, inflation is a market force as inevitable as the rising tide.
A small amount of inflation is considered healthy and can encourage growth and overall prosperity. But as we’ve seen over the past year, a sharp increase in the cost of living can have the opposite effect, and its negative impacts are still being felt across the country. What, then, is a savvy investor to do? How can you ensure that you’re still generating wealth even as inflation grows?
It starts with understanding the fundamentals of inflation and hedging against its negative impacts. How? By diversifying your portfolio with assets that aren’t tied to the financial markets.
We’ll explore inflation in today’s post. You can also check out our latest YouTube video where we further discuss how franchise investing can act as a hedge against inflation.
Inflation is defined as the rate of increase in the prices of goods and services in an economy over a given period of time. Alternatively, inflation can be viewed as a loss of purchasing power of a given currency over a defined period. This is why we make adjustments when looking at prices from decades past.
Consider the cost of milk. In 2019, the average price of a gallon of milk in the U.S. was $3.45, while in 1950, that same gallon cost just $0.83. This doesn’t mean that milk was any less valuable or of inferior quality in 1950. Rather, the price difference reflects the impact of inflation over time. A single dollar simply went a lot further in 1950 than it does today.
How Inflation Is Measured
Inflation in the U.S. is monitored across a number of different indexes and government agencies. Here are three of the most often cited:
- The Consumer Price Index (CPI) is the most commonly used measure of inflation. Administered by the Bureau of Labor Statistics, the CPI reflects the cost of living for the average consumer. Household surveys are used to identify a “basket” of the most frequent purchases and expenses, and the price of that basket is measured over time. The contents of the basket are kept as constant as possible, but are occasionally adjusted to reflect new long-term trends, like the rise of new technologies. In the U.S., the largest component of the basket is typically housing expenses (rent, mortgage, etc.).
- The Producer Price Index (PPI) measures inflation from the producer’s side of the market. As its name suggests, it reflects the average prices producers are getting for goods and services. The PPI is calculated by dividing the current prices sellers receive for the same representative basket of goods as the CPI, and then multiplying that result by 100 to get a percentage. The PPI is particularly useful when trying to forecast consumer spending and demand.
- The Personal Consumption Expenditures (PCE) index is tracked by the Bureau of Economic Analysis. Like the CPI, it measures the goods and services people consume; but it also includes things they do not pay for directly, like health care. The PCE is generally less volatile than the CPI because it excludes food and energy expenditures, which tend to fluctuate rapidly and often.
Inflation: Friend or Foe?
Whether inflation is good or bad depends on an individual’s circumstances and the rate of price increases. A small amount of consumer price inflation is generally considered to be a good thing. The Federal Reserve (often called “the Fed”) is tasked with keeping inflation at a level that encourages spending and investing, which drives economic growth. The Fed typically aims for a 2 percent increase in the PCE per year.
When inflation rises faster than wages, however, consumers feel the sting. Lower-income households are usually the first to be impacted, as the proportion of their budgets dedicated to necessities is much higher. Hyperinflation, meaning out-of-control inflation in excess of 50 percent per month, has destabilized entire nations. Zimbabwe and Venezuela are recent examples of this devastating phenomenon.
Causes of Inflation
The root of inflation is the money supply. More money in circulation means that a single unit of currency has less purchasing power and prices are comparatively higher. Yet inflation can occur in many other ways beyond a government simply printing more money:
- Expanded access to credit
- Increased demand overall for goods and services
- Product shortages/Decreased supply
- Labor shortages
- Increased cost for raw materials
- Policy changes regarding government spending, tariffs, and/or interest rates
The Current State of Inflation
In 2021, inflation made its way into news headlines after hitting its highest level since 1982 – though if we look at the aforementioned list of inflation causes, the reasons this is happening are fairly clear. Manufacturing shutdowns due to COVID-19 crippled parts of the global supply chain, which tripped many sectors of the economy into product and material shortages. At the same time, government stimulus checks and relief programs bolstered savings, so the expiration of lockdown measures led to a burst of renewed spending.
Though wages have seen a sharp increase to compensate for the climbing cost of living, the new year isn’t expected to bring relief right away. Inflation is anticipated to be a continued economic challenge into 2022.
The Omicron variant threatens to exacerbate both labor shortages and existing supply chain troubles in industries from vehicle sales to new home construction. However, as the Federal Reserve rolls back pandemic stimulus measures in favor of raising interest rates, this will likely curb the rise in prices.
Hedging Against Inflation
While wage increases can dampen the impact of a cost of living increase, investing responsibly is one of the best ways to hedge against inflation long term. The term “hedging” dates back centuries to when actual hedges were used as fences to contain and protect livestock. In more modern financial parlance, “hedging” refers to taking steps to protect the value of your investments.
To successfully hedge against inflation, a portfolio is structured so that its rate of return outpaces the inflation rate. Certain types of assets tend to do this better than others:
- Stocks and index funds largely appreciate over time and can do so much faster than the inflation rate. There are no guarantees, however, particularly when the stock market is experiencing an extremely volatile period.
- Treasury Inflation-Protected Securities (TIPS) are special inflation-indexed bonds with interest payments that rise with inflation as measured by the CPI. TIPS pay interest at a fixed rate twice per year and can be purchased through a bank or broker.
- Real assets are tangible items with intrinsic value, which makes them excellent for hedging against inflation. Although their prices in the short term can be hard to predict, they are generally expected to appreciate over time. Some examples include alternative investments such as:
- Gold and other precious metals
- Natural resources
- Fine art
- Vintage cars and other collectibles
- Real estate and franchises
Franchises as a Hedge Against Inflation
Franchises are a sought-after asset class due to their regular cash returns, low volatility, and FTC regulation. Another bonus is that franchises are inflation- and recession-resistant: When inflation rises, so do the prices of goods and services that franchises sell, which leads to higher profitability and investor distributions. A more profitable business also appreciates faster, providing a long-term hedge against inflation.
It’s worth noting that for franchises, high yields are not simply a product of an inflationary period – they are a regular feature of the asset class. Investors are putting their money into a proven business that is primed for market entry. Franchises enjoy the benefit of a loyal customer base and brand recognition that’s been developed over years, or even decades. Because of this, it takes less time for the business to become established and begin to generate profits.
While most people associate franchising with restaurants and fast food, this business model is actually present in over 100 industries. In 2020 there were an estimated 753,770 franchise establishments in the United States, covering a huge range of sectors, including:
- Automotive services
- Staffing and employment
- Health and beauty services
- Accounting and financial services
- K-12 education
- Home improvement
- And many others
This diversity, along with the ability of the franchise model to scale new technology and adapt quickly for in-demand products and services, makes franchising particularly resilient in times of economic turmoil.
As we work toward recovery in the wake of the initial pandemic, franchises also have the potential to create jobs within the communities they immediately serve, and across the delivery and supply sectors. This makes franchises a relatively stable asset in the long term and presents investors with an opportunity to further diversify their existing portfolio.
In short, franchising offers comparable return potential to more high-risk asset classes like venture capital, with more stability using an income-generating asset that is typically found only in real estate or dividend-paying stocks.
Franchise Investing Made Simple
Until now, franchise investing was a method of wealth-generation reserved only for those with significant time and capital. New entrants to the space had to overcome potentially insurmountable start-up costs and demand for operational expertise. However, with FranShares, anyone can invest in a high-yield portfolio of franchises through our fractionalized approach.
Fractionalized Franchise Investing
You may already have some familiarity with fractionalized investing, which allows pools of individuals to invest in expensive assets like vacation homes, private jets, and racehorses. In the venture capital realm, the equivalent would be a syndication, which is a special purpose vehicle (SPV) that allows multiple investors to back a single company.
At FranShares, we’ve taken this method of ownership and applied it to franchise investing. This allows both accredited and non-accredited investors from all walks of life to purchase partial ownership in a portfolio of pre-vetted, managed franchise locations with high return potential – for as little as $500.
How the FranShares Franchise Portfolio Works
Our model takes the power of crowdsourcing and applies it to franchise investment. FranShares invests in locally operated franchise locations alongside our pool of investors. We then act as the operator for each location and distribute the resulting recurring franchise profits to each investor.
In addition, FranShares remains a co-owner and stakeholder in our investment portfolios. We assume all management responsibilities for our franchise locations and appoint teams who are experts at creating successful franchise businesses. This allows FranShares investors to enjoy returns in their investments while avoiding the stress and responsibility of full franchise ownership.
Benefits of Investing with FranShares
We combine deep industry expertise with a zero-fee approach to ensure our investors maximize their long-term returns – without risking their shirt. Our mission is to help investors reap the benefits of franchise investing with a unique business model that offers:
Our best-in-class franchise management team ensures that our investors enjoy truly passive income through quarterly distributions without actually managing the franchise. We do the legwork – you just sit back and enjoy the returns.
Flexible Capital Commitment
We offer accredited and non-accredited investors the opportunity to invest for as little as $500, although our model also appeals to ultra-high-net-worth investors. Our platform allows everyday people to become fractional franchise owners with the ability to invest the right amount of capital for their own personal circumstances.
Franchises are real assets with little or no correlation to the overall stock market; thus, they act as a hedge against inflation and are not subject to the same level of volatility.
Furthermore, our fractionalized ownership approach allows investors to fully diversify their franchise holdings. Owning a portfolio of franchises across different geographies and industries creates an effective buffer against challenges that may shut down a single franchise or location (such as service franchises closing temporarily during pandemic lockdowns).
FranShares only invests in recession-resistant franchises with a track record of success to minimize volatility and give our investors peace of mind. We perform all due diligence and thoroughly vet each franchise partner for strong brand recognition and market positioning.
FranShares is subject to both FTC and SEC regulation, which requires full disclosure of each franchisee’s background, financials, and performance. In addition, we provide investors with reporting and regulatory compliance documentation above and beyond what these regulators require.
Traditional investment vehicles charge a 1 to 2 percent asset management fee – and that can significantly cut into your returns as an investor. But because FranShares participates in every fund, we are able to waive all platform fees and pass along those benefits to our investors.
Our profits come from co-investment in franchise locations as well as brokerage commissions from the franchisor, not the fund. This approach both preserves capital for our investors and creates parity in the investment opportunity.
More Ways to Generate Wealth
You can, in fact, have the best of both worlds. The value of your franchise investment will increase over time while providing secure, long-term passive income.
If you’re an investor who wants to hedge your portfolio against inflation by adding franchising, FranShares can help you achieve these goals… while eliminating the drawbacks of the traditional franchise model.