Cyrus Purnell, Contributor
Feb. 7, 2022
If one financial term is the hot topic for 2022, it is “inflation.” Inflation worries are showing up in everything from political news asking how inflation will affect the political landscape to daytime shows giving thoughts on how to make ends meet in an environment of rising prices. Now the Federal Reserve has stated that it is aware of the inflationary environment and it intends to take steps to slow the rate of inflation.
While this does mean something to all our budgets in 2022, what does it mean to you as a long-term investor? Should you be making major changes to your long-term portfolio considering inflation? The key to having minimal stress in your investment portfolio is to know that you built your portfolio based on a few key factors. These factors include the nature of your financial goal and your comfort with risk - the chance you could lose value in your investment.
When something like inflation dominates headlines, it is easy to find articles that point to strategies to offset inflation , but is the ultimate goal of your portfolio to offset inflation? In this case, you see suggestions about upping exposure to commodities, inflation-protected securities or equities. In theory, implementing these suggestions may help with offsetting inflation, but if you implement anything new to your investment portfolio, it is time to reassess your entire investment plan.
In the case of a retirement goal that is a couple of years away, you must manage multiple issues at once with your retirement portfolio. You may need to have funds ready for distribution as soon as you retire. You will likely need to have investments 15-20 years into your retirement as well. You must balance these needs with your comfort with investment risk and yes, inflation risk. Your investments should already have the means to address these goals and balance these risks before inflation becomes the next hot topic.
At the writing of this blog post, the Nasdaq has had its worse month in a decade. Which short term news shock should you readjust for now? Which one is more important, a market correction or inflation? How long will either of these things last? The fact is your investment plan should already be constructed to offset inflation and have taken into account that the market can drop at any time.
Spend time on getting your investment plan in order
You may be wondering how you can adjust your investment plan if you don’t have one. It starts with setting your goals and then understanding your own risk tolerance. This will tell you whether you should own more or less of any asset. Earlier this year, we published some steps to making your own investment analysis.
If you decide to add new assets classes into your portfolio like treasury inflation-protected securities (TIPS), make sure you understand how they work. Inflation-protected securities have been around for over a decade, but many diversified portfolios have not carried them because of their performance. It is hard to justify carrying bonds with negative yields .
Then consider whether this inflationary environment is transitory. The Fed can pivot and readjust if inflation drops. If you are making big changes because of inflation today, will you be able to pivot in the future without hurting your portfolio?
Gold and other commodities are another area you should not dive into without doing a lot of research or relying on an investment professional. If you’ve already held real assets, you have likely benefitted from owning them as inflation has crept up. Now you must ask yourself if buying real assets at their current prices offers you much upside unless inflation continues to creep up. If you buy them now and inflation cools down, this part of your portfolio can also cool down.
Ultimately the number of investment tactics you can employ are nearly endless. When things change, there will be no shortage of ideas to offset that change. However, it is your responsibility to make sure the tactics you pursue line up with what you want and what you understand.
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