Topic of the Day

by Jeff Winke

With inflation at a 40-year high, it makes sense to figure out how best to cope. General advice suggests “Return to the basics: Know what you’re spending your money on, have a long-term investment plan, and consider ways to increase your income.” To which, the snarky response is “Yep, I’ll get right on that and magically increase my income.”

We settled down, turned off the sarcasm, and sought out several nearby experts to get their learned counsel on what to do in light of high inflation. Here is what we learned.

“At the end of the day, stock markets are cyclical, as is inflation,” stated Jeffrey P. Kendall, CFP, with Triumvirate Financial Services, Huntersville, North Carolina. “For the long-term investor, it may be in their best interest to make sure their portfolio is allocated to their personal risk tolerance and their personal goals. Of course, there are certain investments that historically have performed better in rising interest rate / high inflation environments, like floating rate bonds, but every investor is unique, so one investment may be better for some and not for others.”

Timothy Alessi, managing partner, with Derse Morgen Financial Advisors, Huntersville, North Carolina offered insights.

“An investor should keep in mind that during times of inflation; higher prices often lead to a decrease in consumer demand, which means companies sell less of their product or services, which then leads to lower company profits and a general decrease in a company’s stock price. This is especially true for high growth companies. Investors in those type companies can continue to hold their positions until inflation and interest rates decline and stock prices rebound. However, it may also be a good time to rebalance their portfolios to tilt away from pure growth stocks and add exposure to more value oriented stocks that pay dividends. Including utility, healthcare, and energy stocks can also provide some protection against market declines in the event that inflation leads to a recession.”

Zar Razack, owner of Purpose Driven Financial Services, Huntersville, North Carolina had advice.

“Inflation somewhat depends on the rate of growth. Smaller inflation is good for the market and staying in equities is the right move as in theory the company’s revenue will increase because of the increase in pricing while maintaining demand. The problem with this strategy right now is that we are in a hyperinflation state and thus the Fed is having to raise interest rates as well as monetary supply in order to try and slow inflation. There is some thought that they might have to almost stop the economy to do so. This is bad for stocks (equities) overall. Usually the shift would be to bonds, however the bond market is not pricing in the rate increases to last and thus bonds are very volatile right now. We have advised clients to look at money market accounts for the time being or to look into tactical asset strategies where money managers have the ability to move in and out of various categories on a daily basis. Some of these managers also have the ability to participate in options trading which can also help as a hedging strategy.”

Sound advice from all the experts for dealing with inflation is to make certain an investment portfolio is diversified and that there is a long-term plan in place.

“Look to invest in things people will always need, such as consumer staple stocks like medicine and food,” stated Shauntae Funkhouser, CPRS, investment advisor representative, A4 Wealth Advisors, Huntersville, North Carolina. “Ask your advisor if you could benefit from investing in alternative investments like REITS and commodities which tend to have less volatility.

“Consider that up to $10,000 can be invested in a 30-year term I bond, which is currently paying 9.62% through October, the rate is reset every 6 months. These bonds need to be set up on your own through the US Treasury Department, so you can’t purchase them through your brokerage account. This is a solid investment, if liquidity is not a major concern, since they must be held for at least a year …cashing out prior to holding the bond for 5 years will result in forfeiture of the last three months of interest. The biggest thing investors need to avoid is having an emotional reaction and locking in losses by selling off all of their portfolio and putting it into cash or to just stop investing altogether. Investing is for the long haul. Over time, the market will rebound … it always does.”

David Hedges, president at Bookman Bright, Inc., Davidson, North Carolina, offered perspective. “Given high inflation, it’s more important than ever that you maximize return on your capital and remain within your risk parameters. Keeping lots of money in a bank savings or checking account only guarantees that you lose more purchasing power. There are other alternatives that carry very low risk and some none at all for cash that you don’t need.

“The types of investments that work better than others during inflationary times has a lot do with your risk tolerance, liquidity needs, etc. I can tell you that any money that you don’t need for the foreseeable future is likely not well-served in money market and savings accounts.” Hedges offered a conclusion that all the experts are likely to concur. He offered three top tips to follow when the inflation rate ticks up?

“Review your investment portfolio to try and identify what may do poorly during high inflation. Maximize interest earned on money. With few exceptions, stay away from mid to long term bonds.”

Coping with high inflation is always a struggle. To panic won’t help, but it won’t hurt to check your cash reserves that are stuffed under your mattress. The consensus has always been to have three to six months of funds to cover expenses. To sleep better on a softer mattress choose lower denomination currency that can be fluffed up contributing to a better mattress base.