Inflation popped its head up in December for the first time in years. Is it a big deal or a big non-event? A little inflation at 2% is generally seen as a healthy metric for the US economy — far better than deflation — but what does it mean for your investments and spending? With inflation back on the radar, what can and should you do about it?
Maintain your spending. At low levels, inflation won’t affect your consumer spending or lifestyle. Wealthy people are impacted more by real estate prices and education costs than by the price of eggs and bread.
Keep your debt. Inflation can reduce the value of your outstanding debt (mortgages, etc). A family that holds a $1 million fixed rate mortgage balance during a time of 2% inflation effectively shrinks its debt obligation by $20,000 per year. As long as your interest rate is reasonable, it pays to hold debt during times of inflation.
Avoid holding too much cash. CDs and high-interest savings accounts can help. Even with those products, you may just be running in place. Picking a cash balance that fits your lifestyle and gives you peace of mind is more art than science. Keeping 12 to 18 months worth of expenses in cash is plenty. Anecdotally we see that many investors have a lot of cash on the sidelines right now – either because they’re waiting for the right moment or they chose not to re-invest while they were earning.
In your portfolio:
Hold on to equities. Stock returns tend to float over inflation. This is especially true over the long term where stocks beat inflation by a wide margin.
Avoid buying low fixed rates of return in the near future. If you buy a municipal bond portfolio paying 2% and inflation rises from zero to 2.5%, as it has recently, you end up with a locked in negative real annual return on investment of -.5% per year. That means you’ll have to accept a lower price when you’re ready to sell.
Expect higher GDP and earnings. These metrics will be lifted by inflation, creating a positive feedback effect. We are in a rare period where earnings and GDP are increasing around the world. Investors will adjust their numbers up by inflation. Seeing 3% or more GDP growth and 8% growth in earnings creates a positive psychological effect.
Call or email us if you’d like to discuss the role of inflation in your financial strategy. There is plenty more that was not covered in this article.
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.