How will inflation affect my investments?
Read this Periscope to learn how inflation affects different investments and what we are doing about it here at A&I Financial Services LLC. Also, vote your proxy statements!
Inflation means prices are rising for the goods and services we purchase. Why do we say inflation “may be rising?” Why do we not know for sure?
We do not know whether inflation is back, for certain, until after the fact. Like interest rates, inflation is famously difficult to predict.
We have many measures of inflation. Lately, home prices are up, gasoline prices are up, and food prices are higher as well. These are all components of a popular measure of inflation called the CPI.
One measure of inflation is the CPI: Consumer Price Index. It is published on a regular basis from the BLS: Bureau of Labor Statistics. CPI measures a weighted average of costs for:
For more about how CPI is calculated, click here. For the most recent CPI information, click here. Recently, CPI is rising.
Another popular measure of inflation is PPI: Producer Price Index. This measures the costs used by companies. It, too, is rising. Traditional economic theory says the companies will pass on their higher costs to their customers.
Inflation reduces our purchasing power. Every year, (almost) everything we buy gets more and more expensive.
Inflation both hurts and helps equities. During previous times of rising inflation, the volatility of equity prices increased. If you have talked with your financial advisor, you may already be aware that volatility is not the problem many of us are conditioned to think it is. In fact, volatility is the primary reason equities do better than other investments over long periods of time. Dr. Howard calls this fear “Volaphobia.”
Some types of equities traditionally do better in rising inflation markets. Value investments tend to outperform. High-dividend companies tend to underperform in periods of rising inflation.
MIT source and UPenn Wharton source accessed 15 April 2021
Rising inflation is generally not good for bond investors. The Federal Reserve attempts to control inflation by raising the interest rates. When interest rates rise, bond prices decline. Additionally, inflation destroys the purchasing power of the dollar. So, the future value of that bond is not worth as much as it would be with lower inflation.
During rising inflation times, real estate has a history of doing fairly well. All the threats associated with bonds are true for real estate. However, real estate benefits from several things. One easy one to understand is the rising costs of lumber and supplies. When those prices go up, the price of new buildings go up, and thus the value of current buildings does too.
In sum, investing in a rising inflationary world is a balancing act!
So, if we are worried about inflation, what are we going to do about it?
Let’s begin with our what we believe and also take a look at our values at A&I Financial Services. We believe that real-life, long-term financial success is the product of a financial plan. We do not believe that most, if not all, failed investors do two things: First, they attempt to respond to the news of the day. Second, they do so by timing the purchase or sale of equities.
Instead of allowing the inflation news to guide our investments, we adjust the financial plan. Talk to your financial advisor about the inflation forecast tools we use. See what this might mean for your investment portfolio. You will learn if there is anything at all you should do with your investments, but only after we first look at your real-life, long-term financial plans.