By: Lynnley Browning
Published: April 6, 2022
Panicked about inflation? A little perspective might calm things down.
With gasoline prices around $6 a gallon in California and stock and bond markets jittery about the economic effects of geopolitical tensions in Ukraine, the twin forces of higher prices and lower investment returns have investors worried about an erosion to their retirement nest eggs. It’s a concern that’s been absent for a generation.
As “The Best Strategies for Inflationary Times,” a recent Duke University paper, said, “over the past three decades, a sustained surge in inflation has been absent in developed markets. As a result, investors face the challenge of having limited experience and no recent data to guide the repositioning of their portfolios in the face of heighted inflation risk.”
With consumer prices up 7.9% in February, the highest in 40 years, here’s what six financial advisors, investment analysts and wealth management experts and executives say about the “hidden tax” of having to spend more money for fewer goods and services.
Temporary vs. persistent
Matt Dmytryszyn, the chief investment officer at Telemus, an independent advisory firm based in Southfield, Michigan
“We are looking to differentiate between temporary (near-term) versus persistent inflationary hedges for a portfolio. Assets such as commodities, precious metals or natural resource equities can benefit from near-term surprise upticks in inflation. The challenge with these assets is that they have higher, equity-like risk profiles that can add downside risk to portfolios if they aren’t timed right.
“We believe a small allocation to these assets to be a prudent means of protecting against nearer-term surprises in inflation. Adding assets such as real estate and infrastructure can help combat a more persistent bout of inflation, but they’re not able to reprice as quickly as commodities.
“The challenge is that the valuations of some sectors have already priced in higher inflation to some degree. Some segments of the real estate market are selling for record low capitalization rates and requiring multi-year double-digit rent growth to justify a reasonable return. Infrastructure assets, on the other hand, remain more attractively valued and possess the ability to reset prices in response to higher inflation.”
Rotate
Brad Roth, the chief investment officer at THOR Financial Technologies, a company that provides independent advisors with suggested asset allocations and weightings
“We’ve seen an increase in advisors rotating out of bond ETFs inside of their core portfolios. We’re also seeing an increased interest in hard metals such as gold and are fielding a lot of questions surrounding Bitcoin exposure. Advisors have started to open up to the idea of holding only equities inside client portfolios and marrying it with guaranteed income products, such as annuities, to offset the overall client risk.”