By Adam Bruno, Certified Financial Fiduciary®
Inflation is a steady rise in the price of goods and services over time and actually signals both good and bad economic conditions. On one hand, as prices rise, someone living on a fixed income cannot purchase the same amount of goods, so they tend to reduce spending or buy cheaper alternatives. On the other hand, when inflation rises, the Federal Reserve tends to reduce interest rates, making it cheaper to borrow money — so spending picks up.1
This cycle of inflation tends to go round and round. Many factors can cause inflation — including a growing economy — but there are monetary policies that help drop the inflation rate in time. Likewise, each of us needs to be able to manage how inflation affects our household finances throughout these cycles, and those management strategies differ based on your situation.
For example, someone working full time may be able to adjust spending based on fluctuating prices. However, many retirees live on a fixed income and have fixed expenses, so when prices increase that can squeeze the household budget. If you’d like to learn about ways to position assets so that you can increase income when needed without threatening your financial security, please give us a call.
Inflation can actually be positive for stock investments, as a company’s revenues and earnings tend to move in tandem with higher prices. Interestingly, the stock market has held remarkably well even in the low inflationary environment the U.S. has experienced throughout the past two decades. The fact that inflation is rising now isn’t necessarily a negative for investors; the traditional theory is that stock prices should increase alongside prices of consumer goods.2
At present, the Fed expects the economy to continue growing despite the ongoing coronavirus. In fact, the agency projects inflation-adjusted GDP growth of 7% for this year and 3.3% in 2022. If this projection holds, interest rates are likely to stay in their current low range until at least 2023.3
Investors worried about rising prices impacting their portfolio may want to consider one or more inflation-mitigation strategies. For example, allocate more assets to sectors that tend to increase along with inflation, such as the energy, materials, technology and financial sectors.4 Other asset classes that tend to move with accelerating inflation include commodities, real estate, and industrial and precious metals.5 Fixed income investors may want to take a look at Treasury Inflation-Protected Securities (TIPS), a type of U.S. Treasury security whose principal amount is adjusted to reflect the inflation rate.6
If you are unsure of what to do with large amounts of cash, please understand that you could potentially be down 5-7 percent this year on that cash from inflation alone. If you are like me, you understand the turbulent and volatile times that we are living in. Now, more than ever, you need to be made aware of your options, and you need to educate yourself to protect your retirement and your legacy. You have worked your entire life for it. You can get the answers, and you can be a part of the solution. You have the same questions and concerns that families we sit with every day have. You will have a one-on-one consolation with the team here at Evolution and get the answers to questions that you might not have known to ask! You will feel so much better knowing that your legacy is protected. All you have to do is register for one of our dinner events, webinars, or just reach out to us. You can find success that few families find in retirement, and we can help you!!!
Content prepared by Kara Stefan Communications.
1 David Floyd. Investopedia. May 17, 2021. “9 Common Effects of
Inflation.” https://www.investopedia.com/articles/insights/
122016/9-common-effects-inflation.asp. Accessed Aug. 26, 2021.
2 US Bank. Aug. 6, 2021. “Effects of inflation on investments.”
https://www.usbank.com/financialiq/invest-your-money/
investment-strategies/effects-of-inflation-on-investments.html.
Accessed Aug. 26, 2021.
3 Taylor Tepper. Forbes. Aug. 25, 2021. “Who Should Worry About
Inflation—And Who Shouldn’t.” https://www.forbes.com/
advisor/investing/inflation-worries-2021/. Accessed Aug. 26, 2021.
4 Scot Landborg. Kiplinger. Aug. 20, 2021. “8 Ways to Insulate
Yourself from Inflation.” https://www.kiplinger.com/personal-
finance/603306/8-ways-to-insulate-yourself-from-inflation.
Accessed Aug. 26, 2021.
5 US Bank. Aug. 6, 2021. “Effects of inflation on investments.”
https://www.usbank.com/financialiq/invest-your-money/
investment-strategies/effects-of-inflation-on-investments.html.
Accessed Aug. 26, 2021.
6 Collin Martin. Charles Schwab. June 24, 2021. “Treasury Inflation-
Protected Securities: FAQs about TIPS.” https://www.schwab.com/
resource-center/insights/content/treasury-inflation-protected-
securities-faqs-about-tips. Accessed Aug. 26, 2021.
We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.
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