Australians are naturally concern about Cost of Living...

Australians are naturally concern about Cost of Living pressures, but are they aware of Concentration Risks?

Concentration risks arise from being in the position where one can be subjected to double or triple whammy from an adverse event. For instance, an executive working in a construction company with significant share options in a listed construction firm and an equally large position in banks and a large mortgage stands to be hit on many fronts if we get Big Kahuna 2.0 that results in GFC 2.0. How? Begin with a diminution in value of stock options , bank stocks get clobbered due to high exposure in property sector, and then loss of job in the construction sector and inability to service mortgage debt , that’s concentration risk.

Applying that to a high inflation environment that could morph into stagflation. So if you own a large equity portfolio and a large mortgage , you could be hit on 3 fronts, a large loss on the equity portfolio , a possible disaster if it involves margin debt, a higher interest rate on mortgage debt arising from higher rates due to higher inflation and a possible loss of job if we get to the depth of stagflation. And to top it all, no or lack of liquidity means a possible sale of assets such as residential home at the time prices are much lower.

I am sure when Big Kahuna 2.0 arrives, many who are like the above would be unprepared and forced to make choices that are not ideal. Being prepared means to unwind current concentration risk so as not to become a victim of circumstance.

How we manage this inflation is by avoiding losses on equities arising due to higher rates. Higher inflation means higher rates and higher rates are never kind to equities. Instead of losing on equities, funds can be deployed to reduce mortgage debt so higher mortgage rates do not translate into higher mortgage debt burden. Excess liquidity is also positioning us to make great equity purchases at much lower prices then , gains of which can help offset rising cost of living.