What does it look like to use investing as a form of inflation protection?
Here are three things to remember when it comes to inflation and your asset allocation:
1. The assumed safety of a bond buffer can be misleading
When thinking about how their portfolio will respond to inflation, people should first consider their equity market participation profile. Often, the less equity exposure a portfolio has, the worse the outcome of inflation on that portfolio’s purchasing power will be.
While bonds may seem like a haven during times of inflationary pressures, a bond buffer could let you down over time.
Yes, bonds or fixed income exposure can provide a short-term buffer from the volatility of equities. In the long run, however, they may not protect you from the eroding effect of losing purchasing power because of inflation, which leaves your portfolio vulnerable.
Work with investment professionals to make sure your portfolio is set up appropriately for you and balances the benefits of diversification with inflation protection.
2. Cultivate your willingness to be invested with the appropriate allocations
There is a difference between a person’s willingness and ability to accept a risk profile capable of outpacing inflation. Willingness is the “sleep at night factor.” (i.e., Can you sleep well at night invested as you are?) Ability is a data-driven decision tied to your financial plan that factors in your retirement horizon and the aggregate size of your portfolio.
Even though equity market participation can be important when investing for inflation protection, not everyone is equally comfortable with it. Someone may be simultaneously concerned about inflation and nervous about short-term market volatility as they increase their equity market participation. If this is you, how can you bridge this disconnect so you can invest with confidence?
Partnering with a financial advisor allows you to lean on others’ expertise to cultivate your willingness so that it matches your ability to invest in the equity market. A financial plan is another valuable education tool, showing why you are invested the way you are to achieve your goals and how your assets will fare over time.
Ultimately, cultivating your comfort with equity market participation can help you invest in a way that better protects you against inflation.
3. The equity market and economy respond differently to inflationary pressures
During inflationary periods, it’s easy to assume the worst, anticipating recessionary risk and added equity market volatility. The reality, however, is significantly less pessimistic. First, the equity market and economy respond and react differently to inflation. Just because one responds poorly doesn’t mean the other will follow suit. In addition, as we’ve said before, the markets and the economy rarely react in a way the masses expect them to.
That’s why, when investing for inflation protection, it’s important to abide by the overall guidelines of wise investing and not operate from a headspace of fear or cynicism.
At Credent, our Investment Team is skilled in risk management and aims to help clients maintain their standard of living without worry. With the right portfolio, we believe you can be properly protected from inflation. In addition, our advisors can stress test your financial plan based on different inflation rates to make sure you’re set up for success.
For more personalized guidance on investing for inflation protection, reach out to our team using the form below.