The greatest threat to income investors is inflation. And red flags warning that it’s on its way are popping up everywhere. But no one seems to be paying any attention to them.

And these early indicators are coming from what the Fed considers the most reliable source of inflation data – the labor market.

Everything in the jobs numbers is pointing to higher inflation.

The number of working Americans has been increasing for seven years, and unemployment hit 4.2% in September, its lowest level since 2009.

Low unemployment means increasing wage demand. And wage demand is the primary driver of inflation.

Think about it... When unemployment is low and workers are not desperate for jobs, they aren’t as willing to accept lowball wages.

That also suggests that workers are staying in the job market longer, thus increasing their ability to bargain for wage increases.

In order to maintain profits, companies that are forced to raise wages tend to increase the prices for goods or services they sell. This ultimately puts upward pressure on prices as a result of labor costs.

And we’re certainly starting to feel the pressure...

Between August and September, average hourly earnings for private sector workers rose 0.45%. They rose 2.9% over the past year.

The labor participation rate is up, and unemployment
is down.

Despite two major hurricanes in September, U.S. consumer sentiment rose in October to its highest level since 2004. That means more spending, which leads to higher demand and higher prices.

And analysts are predicting more upward pressure on prices from Trump’s promised tax plan.

Theoretically, once consumers receive the proposed tax breaks, they’ll have more income to spend elsewhere. That should drive up prices... and inflation.

The writing about inflation is on the wall, but most investors have been lulled into complacency by a market that seems to have no top. And they are doing nothing to prepare for the inevitable.

In fact, most people are doing the opposite of what is required to limit the damage of and benefit from an inflationary environment.

Despite near-record-low yields and a huge sell-off in muni bond funds following Trump’s election, there have been record inflows into bond funds at some of the lowest yields in decades.

And bond funds are one of the worst places for your money when inflation and interest rates move up.

I’ve said it many times... Fund managers hold long maturities and leverage their holdings to inflate yields to attract uninformed buyers.

Remember, long maturities and leverage will drive the net asset value and the share price of a fund down in a rising rate and inflationary environment.

The Treasury futures market is telling us there is an 88% chance of another rate increase from the Fed this December. And there will likely be more to come.

So investing in – or being invested in – a bond fund is one of the biggest mistakes you can make right now. If you do nothing else to protect yourself from the ravages of inflation, at least get out of any bond fund with an average maturity that is longer than seven years or has more than 20% leverage.

Despite all this gloomy inflation talk, there are steps you can take to safely hold income investments and even benefit when rates move up. But they require that you shift gears and scale back your yield expectations.

The table above tells the whole story. Please note, this table is for illustrative purposes. It does not represent any specific investment.

If interest rates move up one point, a government-guaranteed 30-year Treasury will drop in market value 17%. A two-point increase in rates will drive the 30-year down 31%.

But the two-year Treasury bond price will drop only 2% with a one-point increase and 4% with a two-point rise.

The same idea of shorter maturities and smaller market price changes applies to corporate and municipal bonds, too. And controlling how much the market price of your holdings drops in response to inflation-driven rate increases is the key to the success and safety of your income sources.

Lower market price volatility reduces panic-selling. And mark my words, panic-selling will escalate as inflation and rates rise and long-maturity bond prices drop.

It will be responsible for almost all losses in bonds.

Shorter maturities also reduce the amount of time your money is exposed to inflation.

If you’re holding long-maturity bonds that drop in value as rates and inflation take hold, you are earning less in interest than the market is offering for a longer period. And inflation has more time to erode the bonds’ value.

If you’re holding 10-, 15-, 20- or even 25-year maturities, or long-maturity bond funds, you have two choices: Hold the bonds and watch your buying power dwindle slowly over the extended period, or sell at a loss to buy into rising rates.

Neither is an appealing option.

With shorter maturities, you can control volatility and limit how long your bonds are exposed to inflation. The best part: You’ll reduce losses due to panic-selling and the effects of inflation.

The problem is that shorter-maturity bonds pay lower yields, and the average guy looks for the higher yields, not the lower ones. That’s the nature of the beast and the reason why so many income buyers will be crucified over the next few years.

Not tomorrow, not after the next set of inflation data and not after the December Fed meeting... right now is when you must adapt your income strategy to accommodate changing market conditions.

So scale back your return expectations in shorter-maturity bonds or prepare to have your head handed to you.

I kid you not!

None of us have the time to refinance our retirements or rebuild our nest eggs. Prepare for rising inflation today.

We received nearly 500 responses to the healthcare survey we sent out a few weeks ago.

Thank you to those who shared their hopes, dreams, fears, difficulties and victories. There were many very personal stories and messages. The fact that you were willing to open yourselves up to me like that is humbling.

I received a lot of very nice compliments as well. I’m not going to toot my own horn here and reprint them, but I read all the responses and I greatly appreciate them.

I was also thrilled to hear from Members who are generating anywhere from $150 per month to $140,000 per year in income from The Oxford Income Letter.

One thing that jumped out at me was the response to the question “What is your biggest concern right now?”

The second most common answer – behind not having enough for retirement – was a downturn in the market.

I want to address the worries about a market downturn. It’s totally understandable that so many feel that way.

So here are three steps to deal with a market downturn before it happens...

1. Sell if You Can’t Handle the Risk

If you need the money that’s invested in the market in the next three years, sell your stocks and put the money in something safe like a money market or certificate of deposit. You won’t get much interest, but the money will be there for you if the market heads lower.

Anything can happen in the market, especially in the short term.

If a drop in the market will affect your ability to pay bills in the next three years or sleep at night, get that money out of the market immediately.

I realize it can be tough because if you’re invested in stocks in The Oxford Income Letter, you’re earning at least 4% on your money and probably more. That income will disappear if you go to cash.

But what good will that income be if the market is down 15% when you need to pay bills?

I’m not doing myself any favors here, but I’ll say it again because it’s important. If you need the money that’s invested in the stock market within the next three years, sell now and put the money somewhere safe.

2. Take a Deep Breath and Hold On

Dividend stocks tend to be safer than nondividend payers in bear markets. The dividend acts as a buffer, plus their prices fall less.

In a study published in the Journal of Corporate Finance, Professors Michael Goldstein of Babson College and Kathleen Fuller of the University of Mississippi concluded, “Dividend-paying stocks outperform non-dividend-paying stocks by 1 to 2% more per month in declining markets than in advancing markets.”

In the recovery and recessionary phases of the 2001 and 2008 recessions, Dividend Aristocrats (stocks in the S&P 500 that have raised their dividends for 25 years in a row or more) outperformed the S&P 500 by 6.45% annually.

If you have a long-term time horizon, take a deep breath and hold on.

Think back to 2008 and 2009 when it felt like financial Armageddon. It took 5 1/2 years to get back to the previous high. That’s not nothing, but it’s not the end of the world either.

Once the market went positive on a price-only basis, if you included dividends, the total return was more than 12%.

Eight years after the top, the market was 34% higher. You had a 50% total return including dividends.

And as of September 30, the market was 63% above the 2007 high. Your total return was 84% if you included dividends and 102% if the dividends were reinvested.

So even if you had terrible timing and invested at the very top, right before a historic decline in the market, you still had a profit just a few years later. And 10 years after the top, you doubled your money.

Keep in mind, this is investing in the S&P 500. If you invested in Perpetual Dividend Raisers, your dividends were higher and so were the total returns.

Markets go up over the long term, and Perpetual Dividend Raisers outperform the market. So when things get rough out there, hold on, confident that in a few years you should be made whole.

3. Buy More

In my book, Get Rich With Dividends, I mention that a bear market can be a dividend investor’s best friend.

If you have a long-term time horizon and money to invest, you’ll have the opportunity to buy great Perpetual Dividend Raisers at lower prices and higher yields.

Additionally, if you’re reinvesting dividends, the lower share price means you’ll accumulate more shares, which generate more dividends, which buy more shares and
so on.

When you get to the point where you want to stop reinvesting and collect the dividends, you’ll have more shares kicking out more income to you.

Let’s say you have $100,000, you buy stocks with an average yield of 4%, whose dividends grow an average of 8% per year and whose prices rise in line with the historical market average of 7.65% per year, and you reinvest the dividend.

After 10 years, you’ll have $310,764.

But look what happens when there’s a bear market at the beginning of that 10-year investment period.

Let’s assume the market falls 15% per year for two years. That’s pretty rough.

Because of dividend reinvestment, instead of being down nearly 30%, you’re down 21%. It still hurts, but not as bad.

It then takes another 12 years for you to reach that $310,764 figure. So instead of tripling your money in 10 years, it takes 14 because of the bear market at the beginning.

But here’s where it gets exciting for income investors. After 10 years in the first scenario with no bear market, you’d be earning $11,598 per year in dividends.

With a 15% decline in the market in the first two years, because you’re reinvesting the dividends at lower prices, you’d have more shares generating dividends.

As a result, after 10 years (two years with a 15% decline and eight years with a 7.65% increase), your income would be $16,660 per year.

That’s a meaningful difference, all because you accumulated more shares as the market fell in those first two years.

Bear markets fray the nerves. But if you know how to handle them and have a long-term perspective, you can not only withstand them but prosper.

We believe it’s helpful to share questions and clarifications on dividend-investment strategies with all of our subscribers. Keep in mind, Marc can answer your general strategy and service questions, but he cannot give personalized advice. As always, feel free to send us your questions at mailbag@oxfordclub.com.

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