If one financial term is the hot topic for 2022, it’s “inflation.” Inflation concerns appear 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 a rising price environment. Now, the Federal Reserve has said it is aware of the inflationary environment and intends to take steps to slow the rate of inflation.
While this means something for all of our budgets in 2022, what does this mean for you as a long-term investor? Should you make any major changes to your long-term portfolio given inflation? The key to having minimal stress in your investment portfolio is knowing that you’ve built your portfolio around a few key factors. These factors include the nature of your financial goal and your tolerance for risk – the possibility that you will lose value in your investment.
When something like inflation dominates the headlines, it’s easy to find articles that point to strategies for offsetting inflation, but is the ultimate goal of your portfolio to offset inflation? In this case, you see suggestions for increasing exposure to commodities, inflation-protected securities, or stocks. In theory, implementing these suggestions can help offset inflation, but if you’re implementing something new in your investment portfolio, it’s time to reevaluate your entire investment plan.
In the case of a retirement goal in a few years, you have to manage several problems at the same time with your retirement portfolio. You may need to have funds ready to distribute when you retire. You will probably need to have investments 15 to 20 years after you retire as well. You need to balance these needs with your comfort with investment risk and, yes, inflation risk. Your investments should already have the wherewithal to achieve these goals and balance out these risks before inflation becomes the next hot topic.
At the time of writing this blog post, the Nasdaq had its worst month in a decade. Which short-term news shock should you readjust for now? Which is more important, a market correction or inflation? How long will either of these things last? The thing is, your investment plan should already be built to compensate for inflation and take into account that the market can fall at any time.
Spend time 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 defining your goals and then understanding your own risk tolerance. This will tell you if you should own more or less of an asset. Earlier this year, we published some steps for doing your own investment analysis.
If you decide to add new asset classes to your portfolio, such as Treasury Inflation-Protected Securities (TIPS), make sure you understand how they work. Inflation-protected securities have been around for more than a decade, but many diversified portfolios haven’t carried them because of their performance. It’s hard to justify carrying negative-yielding bonds.
Then ask yourself if this inflationary environment is transitory. The Fed can pivot and readjust if inflation falls. If you make big changes because of inflation today, will you be able to pivot in the future without hurting your portfolio?
Gold and other commodities is another area you shouldn’t delve into without doing a lot of research or relying on an investment professional. If you’ve ever owned real assets, you’ve probably benefited from owning them because inflation has risen. Now you have to wonder if buying real assets at their current prices gives you much benefit unless inflation continues to rise. If you buy them now and inflation slows down, that part of your portfolio may also slow down.
Ultimately, the number of investing tactics you can use is nearly endless. When things change, there will be no shortage of ideas to offset that change. However, it is your responsibility to ensure that the tactics you pursue are what you want and what you understand.