Conversations with clients are always enlightening and can often allow us to talk through a poor decision before taking action. We recently spoke with an investor who wanted to make a change because his fixed-income investments were not keeping up with inflation and his stocks had been declining since the beginning of the year. He wanted to “stop the bleeding” and take the money he had in equities off the table.
And who can blame him? Inflation is at a 40-year high, and stocks are down about 18% year to date as of June 10, 2022. We asked him where he wanted to invest his money. Cash will guarantee he cannot keep up with inflation. Getting more than an 8% return right now would incur excessive risk for money that he requires for spending.
First and foremost, fixed-income investments are designed to protect the principal—not maximize returns. This is money you need to spend within the next 10 years. The investments have a maturity date—you know exactly when you need to spend the money; therefore, you should seek to minimize the risk as much as possible. Fixed investments like Treasury bonds, municipal bonds, and CDs are designed to pay you a fixed amount on a specific date. For that safety, they often yield less than most other investments.
We believe money invested for the long term—more than 10 years from now—should be in equities because over the long term, it should achieve the return you need to overcome what you’re not getting on your fixed investments and inflation.
Inflation at 8% or more is rare and likely will not the norm for the next 30 years. The Federal Reserve tries to manage monetary policy to keep inflation around 2%. While we think the Fed waited too long to act—which is part of why we are seeing such high inflation—we do believe they will succeed, eventually. Inflation may not be 2% every year, but it is the intended long-term average. Our current 8% inflation is temporary. Same for the nearly 18% stock market loss. The long-term average return for stocks is 10.5%. And just like inflation, any given year will not yield 10.5%, but should get returns similar to its longer-term historic results.
For long-term money, equities provide a hedge against inflation because higher prices are built into the stock price. Companies can pass their increased input costs to the consumer. Maintained or even increased revenues eventually translate to higher earnings and, over the long haul, translate to better returns. Investors could sell Energy sector stocks that likely have gains, but we’re back to, “Where do you put that money?” Perhaps you could find a long-term Treasury with a 3% yield; however, that is still 5% less than inflation. Moreover, investors can likely achieve a 3% dividend investing in stocks and still have growth potential.
Inflation is your benchmark for growing and maintaining your wealth. To be successful, you only need a growth rate that will allow you to achieve your financial goals. Don’t lose focus of the long-term, big picture of why you invested. Aim to minimize risk for the money set aside for spending needs and keep long-term money in conservative growth investments that can offset spending and inflation.
If you have questions on how to manage inflation in your portfolio, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the June 11, 2022 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
