Balancing the Challenges and Opportunities of Inflation
As headlines whipsaw from "COVID!" to "INFLATION," those who are over 55 may remember long gas lines, the failed 1974 Whip Inflation Now (WIN) campaign, and President Carter telling Americans to turn down the heat and wear a cardigan. In the 70s, the nation was experiencing a debilitating recession with a triple threat of high unemployment, a stagnant economy, and rampant inflation.
Today's situation is very different and indeed not so dire. Forget traditional responses and embrace the opportunities! Don't be complacent and wait for things to improve suddenly. And don't overreact and make decisions that push you out of your risk-tolerance comfort zone. Your wealth manager may recommend adjustments to help you stay diversified and fully invested. Remember, inflation makes it even more important to grow your money.
How did we get here?
We anticipated that the COVID stimulus efforts of printing and borrowing five trillion dollars would result in inflation. Thirty-five percent of all U.S. dollars didn't exist before COVID! We began advising our clients as early as the 2020 election to consider investments that would be better protected when the inevitable occurred.
Supply chain issues are contributing to the increase in inflation. These are global in scope and are pandemic related. We will know the pressure on the supply chain is alleviated when we can buy a new car without an extra ten thousand dollars added on to the price.
No one anticipated it, but the war in Ukraine has impacted inflation. Costs have risen everywhere as supply levels and distribution channels have been disrupted, particularly in Europe. Every day the news features a new high in the price per gallon of gasoline, usually in California, Hawaii, or Nevada. This situation has the potential to be more short-term than the other two, but we can't forecast how or when it will be resolved.
The impact of inflation on investments
Fixed-rate debt securities are affected the most by inflation because it devalues interest rate payments and repayments of principal. If the inflation rate is higher than the interest rate, lenders lose money after adjusting for inflation. Longer-term fixed-rate debt is impacted more by inflation than short-term debt.
Stashing cash in a savings account is generally not a good idea, although sometimes it is a knee-jerk reaction when inflation is a daily news story. You should have an emergency fund, but in our opinion, it has historically been better to invest any excess. Whether you have decades until your retirement or are enjoying the fruits of your labor now, in past performance, investments have fared better than a bank account.
A wise approach
A recommended approach to protect your portfolio against inflation is to meet with your wealth manager, share your concerns, and explore options. Rely on their expertise, experience, and understanding of your financial objectives to guide your decision-making.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The opinions expressed in this material do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.