Protecting Portfolios During a Time of Rising Prices

Advisors provide insight on inflation

Inflation not experienced in almost four decades touched all Americans in some way in 2021. From prices at the gas pumps, to grocery items, to used and new cars, to online, retail and durable goods —people everywhere have their own first-hand stories that underscore one of the major economic stories of last year.

Now, the big questions for 2022 are how long will inflation last and might it go even higher? For financial advisors and their clients, a key concern is how to best manage portfolios and investments during a time of inflation uncertainty.

Karen Asbra1“It’s possible that higher inflation will be with us for a long-time,” Karen L. Asbra, CFP®, principal and chief operating officer at Rappaport Reiches Capital Management, LLC, told “Advisors Magazine.” “But forecasting future inflation and interest rates is challenging; making short-term changes based on predictions is a form of market-timing, which doesn’t have a great track record of success,” she added. “It’s better to be prepared for various outcomes, including a pickup in inflation risk, as part of a long-term perspective.”

Protecting client portfolios starts with fundamental planning. While persistent inflation remains a possibility, Asbra’s Skokie, Illinois-based firm encourages clients to focus on what they can control — and that includes being prepared for a variety of risks, one of which is higher inflation.

“Stocks, as a growth asset, remain a terrific hedge against inflation, as companies generally can pass on increased costs to maintain their margins,” Asbra explained. “Bond portfolios that are high quality and conservative in terms of maturities, including an allocation to Treasury Inflation-Protected Securities, make sense as well.”

Christopher Kimball, president of CK Financial Services and regional director of Money Concepts, based in Lakewood, Washington, agrees that equities are generally a good hedge against inflation and that it’s unwise to try to time anything that might happen in the markets or the economy.

“When you try to predict what the future of the economy looks like, especially based on the media or ‘experts,’ you soon find out no one has a crystal ball,” he said. “The best approach is to design a strategy that is appropriate for a client's time horizon and risk tolerance and then stick with it!” he emphasized.

Baby boomers have seen two rounds of inflation as the nation experienced a significant rise in inflation in the 1970s and the 1980s. But for millennials and Gen Z, rampant inflation is a new experience.

“My biggest concern for young people is how they will afford big-ticket items such as homes and cars,” Kimball added. “Although inflation usually results in increases in wages, those increases may not keep up with rising prices, putting some financial goals out of reach for younger individuals.”

And Kimball warned: “As long as the government insists on continually printing money and throwing it at all the financial problems they see, inflation stands to only get worse.”

Despite boomers having lived through inflationary periods they are now at a stage of life when the effects of higher inflation can be challenging to their financial plans, observed Scott D. Michael, CFP®, AIF®, partner/senior wealth advisor and chief compliance officer at Pennsylvania-based Domani Wealth.

Scott Michael“Older investors generally prefer less risk in their portfolios, which implies more bonds,” he explained. “Bonds, due to their low rates of returns, are most susceptible to loss of purchasing power.”

Michael said millennials and Gen Z’ers may be better positioned by having the tolerance for larger equity positions which tend to be a better guard against inflation.

“The unwinding of inflationary pressures can take a long time,” Michael said. “Given our culture of instant gratification and expected fast results, it will be interesting to see how younger generations of investors will tolerate an inflationary cycle.”

Michael maintains that the inflation trend is likely to persist into the future. “Unfortunately, most individuals planning for their future have used benign inflation rate assumptions based on the recent past,” he pointed out. “The CPI-U (consumer price index for urban consumers) over the past ten years averaged nearly 2.36 percent. November 2021’s reading was 6.8 percent annualized, nearly 2.9 times the previous ten-year average. With living expenses increasing rapidly, financial projections are eroding significantly,” he acknowledged, warning, “Inflation may cause some to defer their retirement, cut their standard of living or invest differently.”

Posing a different view, Tim Kochis, JD, MBA, CFP® and CEO of Kochis Global, thinks the younger generations may save the economy and thwart inflation.

TimK“The real danger of inflation entering a damaging spiral comes from people’s expectations,” Kochis explained. “Fearing higher future prices, suppliers raise prices, workers demand higher wages, and consumers accelerate demand (‘Buy now, prices will be higher tomorrow!’),” he noted, “all of which cause prices to increase — spurring more of the same price-increasing behaviors…and on and on.”

Millennials and Gen Z’ers may be slow to recognize heightened inflation when and if it arises and are probably unprepared, psychologically, for the behavioral impacts, Kochis added.

“In many ways, this is a good thing,” he said. “Ironically, the very large cadres of unsuspecting millennials and Gen Z may be the salvation, for the economy as a whole, to any really damaging inflation this time around.”

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