08 Sep How Inflation Impacts Your Investments 09.08.22
How Inflation Impacts Your Investments
Inflation is an alarming word that conjures up a variety of different reactions. For those who lived through double-digit plus inflation in the 1970s and long lines for gas, it may revive some bad economic memories. For others, this may be the first time in their investing lives to have witnessed the Consumer Price Index above 3%.
Regardless of where you stand, inflation is a huge consideration when it comes to investing and your personal financial situation. In terms of short-term finances, prices at the pump and grocery store expenditures are a constant reminder of rising costs, immediately impacting people’s spending patterns. We have already started to see consumers shift habits moving away from higher priced brands to more affordable ones.
From an investment perspective, it’s critical we don’t overlook inflation and that we make the necessary adjustments. On a very simplistic level your investment portfolio return should be equal to (or greater than) the rate of inflation (Consumer Price Index) + spending + fees. Quick math suggests CPI at 8% vs. 2% will quickly eat into your spending if you can’t move returns higher. As we are currently experiencing, investing becomes even more challenging in an upward inflationary environment that is coupled with rising rates, pressuring investments with higher valuation multiples.
We recommend addressing inflation in three ways:
- Include investments in your portfolio that provide inflationary hedges like treasury inflation protected securities (TIPS), natural resources, and real estate investment trusts.
- Adapt your spending patterns during higher inflationary periods to protect your investments.
- Remain long-term focused and keep some portion of your portfolio in long-duration assets. Stocks tend to produce higher returns compared to cash or bonds over a full business cycle and this should give you a better opportunity to outpace inflation over time.
Although there are some signs inflation may be abating, it is likely to remain above the 2% level for at least the next year or two. With this in mind, it’s critical to position your investments and spending accordingly. We hope this is helpful as you navigate the inflationary environment we find ourselves in.