Inflation
Inflation has been a dominating topic in the news of late - and rightfully so – as we’re looking at a 40-year high. When you read the news, there is a heavy focus on everything from how the consumer is being affected at checkout to a debate on how the government should act on the issue. Essentially, a lot of short-term focus. The conversations we are having with our clients are on the near-term decisions that need to be made to strengthen the long-term financial outlook. We dive into a couple of those below.
In high inflation environments,
Inflation tax may not be handed down from the government, but it’s real.
Cash, usually perceived as the safest of assets, is arguably the worst place to have your money during a high inflationary period. Its purchasing power is steadily eroded. While some do not have as much time and/or flexibility in combating this because of the requirement for certain liquidity needs, there are many others who are simply sitting on cash due to indecisiveness or panic from market volatility.
Warren Buffet once famously stated: “The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital.”
The current U.S. inflation rate at the time of this post, is roughly 7.5%. The difference between that and what you are currently earning on your cash positions is what you are losing in purchasing power. Finding a way to deploy those assets will help lessen the bite.
So, where are the opportunities?
When we work through the creation of an investment policy statement with our clients, we identify an asset allocation that is most appropriate for their time horizon, risk tolerance, liquidity needs, tax bracket, and more. This asset allocation considers expected volatility. Yet, when topics like inflation, oil prices and elections hit the news, doubt naturally sets in. It doesn’t mean we should sit idle.
At the core, we recommend focusing on long-term strategies like dollar cost averaging, broad diversification, and regular rebalancing.
To get a bit more granular, here are a few opportunities that we are currently looking at:
- High quality, dividend paying companies.
- Value stocks in consumer staples, particularly ones who can raise prices.
- Treasury Inflated-Protected Securities (TIPS) and high-yield bonds
- Cyclical sectors that could benefit from rising prices of goods and services (financials, energy, and materials) – where rising costs are more easily passed on to customers.
- Real estate investment trusts (REITs) and commodities
To be clear, the above list of opportunities is just a handful we are tracking, and by no means a concrete recommendation of what you should or shouldn’t do. Please talk with an advisor about what makes most sense for your situation based on your investment policy statement.