We're wrapping up our first week of 2022. And what a week it's been!

Investors are making big adjustments to their portfolios this year as the threat of inflation starts to sink in.

Personally, I'm a bit incredulous as to why this risk is just now coming to the surface. 

You already know that we've been pounding the table here at Rich Retirement Letter about how to protect your wealth from this growing threat.

It's helpful to note that many of the inflation plays that we've been recommending (energy companies, financial stocks, miners and businesses that own tangible things) have held up nicely.

If you're invested in these areas that are doing well, you probably barely noticed the recent market turbulence. 

I hope you've been able to sidestep a lot of this drama. And I'm frankly very excited about this new market dynamic.

If you invest in the best companies with strong earnings, you'll be in great shape to beat inflation, grow the true value of your wealth and enjoy financial freedom instead of worrying about finances.

I'd love to hear how you're doing so far this year.

Could you shoot me an email and fill me in? Also, please send any questions or comments you would like to discuss in our next mailbag issue.

For now, let's take a look at some of the most recent emails I received from our Rich Retirement Letter readers.

Disaster Insurance for a Turbulent Market

Since the market is starting to become a bit more volatile, let's start with a risk management question from Allen B.

“What is the best disaster trade for rising rates. Manual says buy call options on the TLT way out of the money. Is that the good play here?”

Hi, Allen. This is definitely the week to start talking about rising interest rates. You probably saw that the minutes from the last Fed meeting came out and spooked investors. 

Many Fed members are in favor of hiking rates more quickly. And most investors now expect the first rate hike to come in March.

I'm not sure what you're referring to exactly, but buying calls on TLT doesn’t sound like the best trade to me right. 

This ETF trades in line with long-term Treasury bonds. And when rates rise, bond prices fall.

You wouldn't want to buy call contracts on bonds because call contracts only profit when bond prices rise.

Instead, I've been recommending financial stocks, materials companies (like miners who produce copper, iron ore and other natural resources) and companies that make and sell tangible "stuff."

Energy companies are also doing quite well as inflation drives prices of oil and natural gas higher while the rebounding economy helps to drive demand for these products.

Bottom line: I've been sounding the alarm for bonds (please don't hold long-term bonds in your account) and encouraging people to buy shares of companies with real earnings that make and sell real things.

A Fun Way to Fight Inflation

I had to laugh at this inflation message from Steve C.

“Zach: Just think if you had bought an airplane shortly after your first flying lesson.”

You've got a point, Steve! And the same could be said about buying a car, a home or some other tangible property as inflation started to pick up.

Incidentally, I think there's still time to buy real assets as a hedge against inflation. 

You might have to pay more for them today than you would have had to pay a few months ago. But inflation could take years to truly work its way through the system.

Now, what kind of airplane should I buy? After all, you can't fit all seven of my kids in very many private planes!

Staying Away from Speculative Stocks

When it comes to speculative growth stocks with low (or negative) earnings, 2022 picked up right where 2021 left off.

“Zach: I am a member of St. Paul Research and follow you and your advice.

Thanks for your article about ARKK. I currently own ARKK February 2022 Puts that are now down 28%. Is it time to get out or hold?

Thanks, Martin B.”

Congrats on a successful (so far) trade, Martin! Just so you know, I'll never give individual investment advice so anything I write here is intended for a broad audience.

For those who are just learning about options, buying a put contract places a bet that shares will fall. So as ARKK has moved lower, Martin's profits have presumably been growing.

It can be tough knowing when to get out of a successful position — even though that's exactly what we want whenever we place a trade.

One option is to sell a portion of your position and let the rest run. That way if ARKK were to rebound, at least some profits would be locked in.

Another strategy when holding put options is to sell the current contracts and simultaneously buy put contracts with a lower strike price. 

The new put contracts will cost less, so you'll be able to pull some cash out of your position while still profiting if ARKK continues to fall.

How Does Selling Affect ARKK?

Weeks ago, I wrote about how investors selling shares of Cathie Woods' ARKK ETF can ultimately drive the price of individual stocks lower.

Eve S. wrote in with a great question about this process:

“I don't understand your argument that ARKK will have to be selling rather than buying because investors will be pulling their money out. This is an ETF, right? That means you can't pull your money out; it's not like a hedge fund with at-will clients. All people can do is sell the ARKK shares themselves, which will drive that price down, but fund management can ignore that unless and until they need to raise more money by issuing more shares. Till then, Cathie Wood can do whatever she judges best.”

Good question, Eve. And thanks for the email.

There's a technical process in which institutional investment firms called "authorized participants" can create or redeem shares of any ETF. And this process is driven by how many investors want to own shares of ARKK.

As part of this process, institutions can deliver shares of stock to Cathie Wood's team (and demand cash) or deliver cash to buy new shares. 

Either way, the process keeps the price of ARKK in line with the price of individual stocks that make up the fund. And it ties ARKK as a fund directly to the supply and demand of the overall market.

The ARKK website has some information on this process. And you can do more research on ETF share creation and redemption to better understand the process.

But the bottom line is that when investors sell ARKK, it does affect the price of individual stocks held by the fund.

Is Bitcoin a Stable Currency?

Here's a good question from Frank B. about one of the most heavily watched areas of the non-traditional market right now...

“Bitcoin fluctuates $20/$30 thousand dollars at a time. How can it be a stable currency?”

You're right, Frank. At this point, Bitcoin isn’t a stable currency. It has a history of large fluctuations which can give you motion sickness if you're holding a large position.

At the same time, there are some interesting and unique features for Bitcoin and other cryptocurrencies as well. Some of these features are related to ease of transaction, others related to scarcity and still others related to security and/or anonymity.

It's an area of the market that I'm still learning a lot about every day.

And while I wouldn't hold my entire net worth in Bitcoin or any other cryptocurrency, I'm beginning to think more carefully about building more exposure to certain crypto plays.

Modern Sherlock Holmes

After my reference to "the dog that didn't bark" this week, Randy wrote in with a great suggestion:

“Have you watched the modern Sherlock Holmes on BBC television starring Benedict Cumberbatch? I’m certain that you and your children would enjoy. The game will be on when you start watching.”

Thanks for the suggestion, Randy! Maybe the kids and I will sit down and watch some episodes this weekend.

Speaking of, I hope you all have a wonderful weekend and I look forward to bringing you more investment and wealth-building ideas in the week ahead!

Here's to living a Rich Retirement,

Zach Scheidt
Editor, Rich Retirement Letter
RichRetirementFeedback@StPaulResearch.com