Inflation: What it Means for Your Cash & Potential Risks in Your Portfolio

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You’ve probably noticed lately that you’re paying more for groceries, gas, electronics, and—well, just about everything. In the past year, inflation has been two times the historical average, and many people are wondering how this will affect their long-term financial plans. You might be asking,

How will inflation affect my retirement? Will I have enough money to cover my regular expenses?

Should I change my investment strategy to keep pace with inflation?

What other risks might I be missing?

Inflation creates a ripple effect in our economy, so it’s important to know how it impacts your personal financial world. In this blog, we’re covering some important things you need to know about inflation and what you can do to maximize your portfolio.

What are some financial risks involved with high inflation rates?

The obvious, immediate impact of inflation is an increase in the costs of goods and services, but while this might put a strain on your current budget, it’s usually not a long-term concern.

Instead, the biggest issue we see is for conservative investors (typically those nearing retirement) because they generally have a bond-heavy portfolio, and those bonds have less purchasing power during periods of high inflation. Their rate of return doesn’t keep up with the rising costs of goods.

One of the strategies the Federal Reserve uses to suppress inflation is to increase short-term interest rates. This has a negative impact on bonds and bond funds held inside your portfolio, which leads to falling values in your fixed-income portfolio. Professional money managers can employ strategies that help reduce this risk, which is why it’s important to discuss your situation with an adviser.

Should I adjust my financial plan?

As long as inflation levels out in the next few years, it shouldn’t affect your long-term financial plan. Historically, we haven’t experienced higher-than-average inflation for long periods (10-plus years at a time). However, if it does remain above average for three to five years (or rises higher), it would be wise to revisit your financial plan, because the projected inflation rate used when you and your adviser originally created the plan might not be as accurate.

Either way, if you want a better chance of keeping up with inflation and increasing the value of your dollar over time, it helps to invest in asset classes that historically have kept pace with inflation, like equities, real estate, and commodities.

Know What You Own

There are a lot of things to consider during times of high inflation—will the Federal Reserve increase interest rates? How will that affect your portfolio? Is your purchasing power deteriorating? How does that impact your retirement distribution strategy?

When it comes down to it, the key is to know what you own and how it will react to inflation and rising interest rates. If you haven’t discussed your situation with an adviser, now is the time. Investment professionals can do an “X-ray” of your portfolio and conduct a stress test to see how it will respond to all types of situations. And if some adjustments need to be made, the sooner the better. Reviewing your plan with a professional now could mean the difference between a timely retirement and delaying your golden years because you’re waiting for your portfolio to recoup—don’t let a lack of preparation undermine your future financial goals.

If you are curious about how your current investments or financial plan would react to continued inflation, please reach out and a Strata Capital financial adviser can assist you with an assessment for no charge. You email us at carmine@stratacapital.co

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This article is intended to be for general information about the topic(s) described only, and should not be used as financial advice specific to your situation. For financial advice pertinent to your lifestyle, goals, risk tolerance and opportunities, please contact a financial professional.

Carmine Coppola and David D’Albero are financial advisers offering investment advisory services through Eagle Strategies LLC, a Registered Investment Adviser. They are Registered Representatives offering securities through NYLIFE Securities LLC (Member FINRA/SIPC), a Licensed Insurance Agency. They are also agents of New York Life Insurance Company. Strata Capital, LLC is not owned or operated by NYLIFE Securities LLC or its affiliates.

Neither Strata Capital nor, NYLIFE Securities LLC and its affiliates, nor its representatives, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.