This is a recording of a webinar we gave to clients in June of 2021 on the topic of rising inflation, and how inflation impacts the stock market, your investments in stocks and bonds, and the best way to protect your portfolio from inflation.

For more about our firm and the services we provide, visit:

We look at today’s headlines on recent rise in inflation, and put it in perspective with past episodes of inflation.

Then, we look at how the 3 main assets of your investment portfolio should fare in an inflationary environment – Cash, bonds, and stocks.

While today’s headline inflation numbers seem high relative to what we have experienced recently, they remain well within historical norms and certainly below some notable periods like the 1940s and 1970s.

First, we will look at cash. Of course cash is an important part of your finances, and its vital to keep some amount.

But, as far as long term holdings or a large part of your portfolio – cash is one of the poorer investment choices in a time with rising inflation. Despite that though, it is regularly a very large portion of an investor’s portfolio.

Bank of America does an annual survey of their high net worth investors, so this is people worth more than $1 million, and on average 14% of their net worth was in cash or cash equivalents. So things like CDs, money markets are going to count here as well. And cash has consistently not returned a positive real, or after-inflation return. Even the last 20 years which have seen relatively low inflation, cash has led to about a half of percent per year on average loss to inflation.

And even with just modest inflation going forward, the value of that cash to you gets really hit. This chart here is showing the purchasing power of cash over time with just 2% inflation. Over a 20 year period, which is even a little shorter than a lot of retirements will be for a recent retiree today, cash would see a 33% reduction in value. Now everyone is scared of the stock market going down.

But I think its worth noting here that the general stock market has never returned negative 33% over a 20 year period. Even if you invested in 1929 before the great depression, you had a higher 20-year return than that. And while the short term safety of cash is valuable, few think of their cash allocation as a nearly certain way to get a negative real return.

And if we put in today’s inflation numbers, it gets much worse.With 5% inflation, you lose almost two-thirds of the value of your cash over a 20 year period. So, cash is very valuable because it doesn’t swing up and down in value so much. Having a small amount is important. But it is almost guaranteed to be a terrible long term investment. I think its important to point this out because cash allocations tend to grow as retirees become more risk adverse. And it is also a very common holding for people that are worried about the stock or bond market, and yet there are very few investments that have worse long term returns than cash.

However, like we said, having some amount of cash is important. SO what is the right thing to do with that emergency fund or amount of money you want set aside for safety? I Bonds are a type of savings bond issued by the government. The other savings bonds, which are series ee, those orange savings bonds you probably had growing up, are more popular.

Bonds:

After cash, the next asset that makes up a significant part of your portfolio is probably bonds. As a whole, bonds have done a better job than cash in growing your investments in excess of the rate of inflation. Over the last 20 years, bond have returned an average of 4.8 per year, so giving you a couple percent above inflation. So that is certainly an improvement over cash, but because of how bonds work, they still leave you potentially vulnerable to inflation. Because bonds offer a fixed payment that will not adjust to inflation, holders of bonds are still at risk. Although there are a lot of different types of bonds, most simply bonds will just pay you a flat interest payment every year.

Stocks:
How have stocks done specifically in times like we see today where inflation is rising? This is a chart from an article that was in the Wall Street Journal just the other day, showing how often different investments produce real, or positive, returns after inflation over 1 year periods.And when we look at a little larger data set like this, we start to see that stocks have historically done very well at producing positive returns even after rising inflation. 90% of the time equity investors have come out ahead of inflation, significantly better than even TIPS, which you would think would be better perhaps since they are marketed as an inflation hedge. Stocks have also significantly performed better than commodities, which are also a popular investments for those worried about inflation, and also treasury bonds….(read more)

LEARN ABOUT: Investing During Inflation

REVEALED: Best Investment During Inflation

HOW TO INVEST IN GOLD: Gold IRA Investing

HOW TO INVEST IN SILVER: Silver IRA Investing

How Inflation Impacts Your Investments in the Stock Market and Your Retirement Plan

Inflation is a term that often sends shivers down the spine of investors. It refers to the steady rise in the prices of goods and services over time, eroding the purchasing power of money. While inflation is a natural economic phenomenon, its impact can have significant consequences on your investments in the stock market and your retirement plan.

When it comes to investing in the stock market, inflation can have both direct and indirect effects. Let’s explore these impacts and understand how you can protect your investments and retirement savings.

Firstly, inflation decreases the real value of your investments. When inflation rises, the prices of goods and services increase, which means that the value of the money you hold in your investments decreases. For example, if you have $10,000 invested in stocks and the inflation rate is 3%, then the real value of your investments would decrease by $300. As a result, you may need more money in the future to purchase the same goods and services, making it crucial to factor in inflation when making long-term investment decisions.

Secondly, inflation affects the companies you invest in. Inflation often leads to higher input costs for companies, including raw materials and wages. As a result, companies may face challenges in maintaining their profit margins, especially if they are unable to pass these increased costs onto consumers. This can impact their stock prices, making some investments less attractive during inflationary periods.

However, it’s important to note that not all investments are affected negatively by inflation. Some sectors, such as commodities, real estate, and certain industries like healthcare and energy, tend to perform better during inflationary periods. Investing in these sectors, which are considered inflation-hedging assets, can help protect your portfolio and retirement plan from the adverse effects of inflation.

In addition to the stock market, inflation also has substantial consequences on your retirement plan. If you have a fixed income during retirement, such as a pension or annuity, inflation can erode the purchasing power of those funds over time. For instance, if you retire with a monthly income of $3,000 today, assuming an inflation rate of 2%, in 10 years you would need $3,609 to maintain the same purchasing power. Therefore, it’s vital to consider inflation when estimating your retirement expenses and plan accordingly by investing in inflation-protected assets or seeking investments with higher returns to make up for potential losses.

To offset the impact of inflation on your investments and retirement plan, certain strategies can be employed. Diversifying your investment portfolio across different asset classes can help mitigate the risk associated with inflation. Allocating a portion of your investments in inflation-hedging assets like inflation-protected bonds or diversified commodity funds can act as a hedge against rising prices.

Moreover, regularly reviewing and adjusting your investment portfolio is essential to keep pace with inflation. Rebalancing your portfolio to include assets that tend to perform well during inflationary periods can help protect and grow your investments over the long term.

In conclusion, understanding how inflation impacts your investments in the stock market and your retirement plan is crucial for maintaining the value of your money over time. By considering inflation, diversifying your portfolio, and investing in inflation-hedging assets, you can safeguard your investments and retirement savings from the erosive effects of rising prices.