Wealth Chronicle: Managing Inflation Risk
Alas, all good things come to an end. Between low interest rates, rising debt and stimulus plans, we are witnessing the start of inflation. Fortunately, there are steps you can take to save your money from the ravages of inflation. In fact, investing is a powerful tool to achieve this.
Don’t ignore the threat
It’s easy to look at a number like 3% and conclude that inflation won’t have a substantial impact on your retirement. But it’s important to remember that you’ll likely need this money years, if not decades. With an annual inflation rate of 3%, it will only take you 24 years to halve your purchasing power.
As inflation eats away at your assets over time, interest builds up. You literally earn interest on your interests. This helps to compensate for the drip-drip from the inflation.
Typically, when prices rise, the value of assets increases. Look at the oil stocks. As demand for oil has increased as the pandemic subsides, the value of inventories has also increased. Being invested means that you benefit from some of the mechanisms that drive inflation in the first place.
Of course, the correlation between price and value is never one to one. But the worst thing you can do in the face of inflation is to panic and exit the markets. With the markets at or near historic highs, it can be tempting to sell at high prices, but remember history suggests that money deposited in the bank will lose value, instead of falling in value. be there when you need it most.
Rebalance your portfolio
The other temptation is to put all of your money in “inflation-proof” assets, such as precious metals. While gold and silver can be a good way to diversify your portfolio, it’s important to remember that nothing is guaranteed. If we don’t experience high levels of inflation, those assets risk losing value, leaving you short of what you need for retirement.
Now is a good time to take a look at your portfolio and rebalance it. The money you need in the short term won’t be hit as hard by inflation, so you want a mix of long-term and short-term assets.
It is also crucial to maintain a fiscally diversified portfolio. Remember that taxes are not calculated based on inflation. If you withdraw $ 100,000 from your 401 (k) at retirement, you pay taxes on the entire amount even if your earnings are due to inflation. You don’t want to find yourself in a situation where you pay a heavy tax burden on top of a loss of purchasing power.
Take into account Treasury securities protected against inflation
If you want or need to be careful with your investments, but are worried about inflation, inflation-protected Treasury securities might be a good option. They work like other bonds, in that you receive interest payments, but your actual return follows inflation. In return, you give up the certainty of knowing exactly how much you will receive, and if inflation is lower than expected, you risk earning less.
If you have concerns about inflation, now is a great time to make an appointment with your advisor. They don’t know what the inflation rate will be, but they are used to navigating periods of inflation and calibrating investments accordingly.
The opinions expressed in this document are for general information only and are not intended to provide specific advice or recommendations to an individual.
Investing in precious metals involves greater fluctuation and the potential for losses.