As seen in the Marietta Daily Journal: Bil Lako, CFP®, explains how inflation should be considered when investing.
Read the article below or at the Marietta Daily Journal.
It seems that inflation is everywhere. You’ve seen it at the grocery store, at the gas pump, and reported in the news. We have a lot of elements adding to the inflation story.
First, the consumer is flush with cash. The government has given consumers around $3,200 since March 2020. While many used this stimulus to compensate for cut work hours and lost jobs, many saved or invested this found money. Now that the economy is beginning to open with restaurants accepting full capacity and stores relaxing mask mandates, consumers are ready to spend. Couple that with supply chain disruptions caused initially by China’s manufacturing shutting down and compounded by minimized inventories, a shortage of truckers, and debacles with the Suez Canal and the Colonial Pipeline, and you have a perfect storm for restricted supply. Restricted supply and increased demand is the perfect recipe for inflation.
However, let me put our current inflation into perspective: According to the Department of Labor, inflation, as measured using the “Consumer Price Index,” was up 9.0 percent in 1978, up 13.3 percent in 1979, followed by 12.5 percent in 1980, and up 8.9 percent in 1981. Today’s annual inflation reading is 4.2 percent for the 12 months ended April 2021 Inflation is a natural part of an economic cycle. Aside from asking, “Why is chicken so expensive?” or “Do you know where I can get cheap gas?” the popular question is, “How do I invest through this?” Well, let’s take a look.
Treasury bonds generally serve to reduce volatility. In an inflationary environment, yields tend to be smaller, and risk is greater. If you are investing in bonds for 10-year liquidity needs during inflationary periods, I suggest shortening the maturity to limit downside risk. This will allow you to continually reinvest in bonds with more favorable interest rates and returns over inflation as interest rates rise.
Treasury Inflation Protected Securities (TIPS) are a treasury security that is indexed to inflation to protect investors from the negative effects of inflation. Anticipated inflation and demand drive TIPS prices higher and yields lower. Only a small portion of assets should be invested here if not already held. Also, as more investors purchase TIPS, yields tend to decrease as well. If unexpected high inflation occurs, consider only investing a very small percentage of your portfolio here.
Commodities are the basic raw materials used as production inputs for the finished goods we consume every day. With inflation, it takes more dollars to buy commodities, leading to a perception that they are worth more, or have increased in value. Remember, there are no earnings or dividends on commodities, only price appreciation. This means that to make money, you must find someone that will pay more than you did for the commodity. If you miss the initial run-up in price, your return is limited. However, your downside risk is substantial when demand falls.
In my opinion, stocks are the best vehicle for long-term growth. During inflationary times, I generally recommend larger percentage allocated to the non-durable goods sector, as they can pass inflation costs almost immediately to consumers. It includes consumer staples like food, utilities, toilet paper, and other necessities, as well as fuel. These businesses should be able to maintain profit margins and dividends and serve as a hedge against inflation.
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.
