Tips For Dealing with Inflation in Retirement
Written by: Michael Carbone, CFP®
An increase in cost for everyday goods and services (inflation) is never any fun – especially for retirees. Inflation not only increases your day-to-day living expenditures but may also affect investment returns for assets like stocks and bonds. Although certain asset classes have historically performed better than others during these times, I suggest using caution before making any material changes to your investment portfolio. This is due to the forward-looking nature of the markets. What does that mean? Well, if the consensus view is that inflation is here to stay, it won’t be long before that narrative is baked into prices. Said differently, it may be risky to make big bets on specific asset classes (stocks, commodities, real estate, etc.) performing better than others since markets are extremely fast moving.
A fictitious example of how this may impact an investor – let’s say you hear from your neighbor that inflation is going to be an issue. That’s the last you hear of inflation for a few months, at which point its making headlines on major news outlets. A few weeks later you notice it cost you an extra $5.00 to fill your gas tank - you’re now personally affected by this and conclude that this will be an issue. Your fear bond markets will decline and decide to act by shifting your entire bond portfolio into a diversified commodity mutual fund. Inflation data is reported the following week and it’s much lower than the markets anticipated – leading to a major decline in commodity prices.
Instead of trying to outsmart the collective wisdom of the markets, I suggest making less drastic changes to an investment portfolio to combat inflationary pressures. So, for example, rather than selling all your bonds and buying commodities, remain diversified and maybe overweight commodities relative to what you might own in a normal market. Another example could be shifting a sleeve of high growth stocks into quality companies with pricing power, meaning they’re more likely to successfully pass along rising costs to their customers, thus remaining profitable, etc.
In our view, investment decisions should always be considered the context of an overall portfolio. So, we don’t believe inflation should steer you away from fundamental investment principals like diversification.
Michael Carbone, CFP®
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