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Everything Screams Inflation: What Does it Mean For Your Portfolio?

Listen to Best in Wealth Podcast Episode 175

A Wall Street article, “Everything Screams Inflation,” was published on May 5th, 2021. The opening line says, “We could be at a generational turning point for finance. Politics, economics, international relations, demography and labor are all shifting to supporting inflation.” Is inflation headed higher? The short-term answer is that it already has. So what does this mean for you and your portfolio? Learn more in this episode of Best in Wealth!

Outline of This Episode

  • [1:23] Did you know I am a movie star?
  • [4:51] Inflation is heading higher
  • [7:55] Is inflation moving higher a negative?
  • [10:54] Adjusting your portfolio during inflation
  • [16:50] Why does any of this matter?
  • [20:31] Build a risk-adjusted portfolio

Inflation is heading higher

Two years ago, the New York Times reported that the Federal Reserve was worried that inflation was too low. It could leave the central bank with less room to maneuver in an economic downturn. But inflation has averaged 2.9% since 1926 and nothing in recent years has come close to 3% (except for 2006 at 3.4% and 2008 at 4.1%). The early ‘70s and '80s demonstrated the worst inflation periods. The worst was in 1979, where we experienced 13.3% inflation. But is inflation trending higher something to actually worry about?

The answer to that question depends on where you are in the economic food chain. Airlines now have fully booked flights. Restaurants are struggling to hire cooks and waiters. Why would you not expect the cost of airfare and meals to rise? Stock prices for JetBlue and Cheesecake Factory surged over 150% from their lows in Spring 2020. 

Do price increases signal a coming wave of inflation? Or a temporary snapback following the economic downturn in 2020? This is THE great debate. Is this a sign for years to come? We do not know. But future inflation is one of many factors that investors must take into account when crafting their initial portfolios. 

Why adjusting your portfolio during inflation = market timing

If rising inflation will persist—and do so for a long time—investors may want to hedge against higher inflation. Others might see it as a market timing signal and make changes to their investment portfolio. Remember this: market timers would need a rule that directs exactly when and how to revise current investments. “I’ll know it when I see it” is not a strategy at all. I believe that a rule based on inflation estimates is market timing dressed in different clothes. 

A successful effort means you have to somehow guess when to revise your portfolio and when to change it back. Market timers get it wrong over and over again. Remember, current market prices already reflect the concerns—including inflation. Market timing creates a lot of stress when you should just remain disciplined with a strategy. 

Is inflation moving higher a negative?

Imagine it is New Year's Day in 1979. The market produced a positive return in 1978, ending up 6.6%. What is the problem? The return failed to keep pace with inflation for the second year in a row. Inflation in 1978 was 9%. Your crystal ball should inform you that over the next two years you would see back-to-back years of double-digit inflation for the first time since WWI. You would be right. Inflation was 13.3% in 1979—the worst on record. In 1980, inflation was 12.5%. 

If you had a crystal ball, you may have gotten out of stocks. In 1974, the inflation-adjusted total return for US stock was -35.05%, among the five worst returns going back to 1926. The only problem? You did not know what stock returns would be in the face of inflation. In the same two-year period that inflation accumulated over 25%, the S&P 500 was up 56%! If you took your money out, you missed out on those returns. 

Why does any of this matter?

So much of the recent news regarding inflation is linked to things like government spending and US debt. We cannot minimize the problem. But the expected consequences of these issues are likely already reflected in the stock prices, mutual funds, and 401k's. There are always concerns. The future is always uncertain. But the willingness to bear uncertainty is what gives you the opportunity for profit. We have to put up with bad news and negative returns. There will always be something to worry about. That is why you must address the uncertainty in your initial portfolio design instead of in emotional responses. Do not risk your future on your emotions.

Resources Mentioned

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Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.