(Matson Money) Inflation is a topic that's been on many people’s minds recently. As an advisor, it's important to understand what inflation is, how it can impact your clients' portfolios, and what strategies can help mitigate the impact of inflation on their investments.
First, let's define inflation. Inflation is the sustained trend of increasing prices from one year to the next.1 When inflation is high, the cost of goods and services goes up, which can reduce the purchasing power of money.2 This means that your clients may need more money to buy the same amount of goods and services as they did in the past. Many investments that may have been previously considered to be worth a certain amount could be less in real terms if they do not generate returns that match or exceed the rate of inflation.3 As of January 2023, many economists and Fed officials estimate it will take years for the price increase to fall back down, while some on Wall Street believe inflation could drop sharply and possibly return to historically low levels.3 A forecast in a Bloomberg survey of economists states that they expect consumer prices to remain at or above 5% until the end of 2023.3
So, how can inflation impact your clients' portfolios? High inflation can be especially damaging for retirees, as it can reduce the value of their fixed income investments.4 If the return on these investments does not keep up with inflation, the purchasing power of the income generated by these investments may decrease over time. No one can predict the future. “All of the knowable and predictable information is already in the price today,” says Mark Matson, Founder and CEO of Matson Money. “Stocks are forward-looking. The market is forward-looking. It is only the unknowable and unpredictable things that change prices moving forward.”
One strategy that can help mitigate the impact of inflation on your clients' portfolios is to diversify their investments. Diversifying their portfolio can help to minimize the impact of inflation, as different types of assets may be affected differently. Being a financial coach who knows how to help construct a diversified portfolio based upon a desired risk tolerance can help your clients stay prudent and disciplined for a lifetime.
Another strategy to consider is to monitor inflation. Keeping an eye on the inflation rate and being mindful of how it may impact your clients’ financial goals and investment strategies could make the difference in the health of their financial future. It is hard for investors to not experience amplified concerns surrounding their investment portfolios or succumb to any number of investor biases. Being a financial coach, you can help guide investors to stop looking to use performance history, predict the future, or pick a “winner”, which amounts to merely speculating and gambling with their money. While it's impossible to predict the future, keeping a close eye on inflation rates and adjusting investment strategies accordingly can help minimize the impact of inflation on your clients' portfolios.
It's also important to consider inflation when helping clients set financial goals. When planning for retirement, it's important to factor in the impact of inflation on your clients' purchasing power over time. This means that they may need to save more than they initially thought to maintain their desired standard of living. In 1971, if you had $28,000, you could have purchased a home free and clear; fast forward 52 years to 2023 and you would potentially need 15 times that amount; if you look ahead to 2030, the price tag may keep getting bigger.5
In summary, inflation is an important consideration for any advisor. By diversifying investments, factoring in the impact of inflation when setting financial goals, and staying up-to-date on the latest inflation trends, you can help mitigate the impact of inflation on your clients' portfolios and help them achieve their long-term financial goals. Additionally, investors can engage in ongoing education by attending investing seminars like Matson Money’s 2-day educational event, the American Dream Experience, where they can learn about the science of investing and have an open conversation about what often goes undiscussed for families: their financial future.
“History is precise on this,” says Mark Matson. “No one can tell you where the next 20% movement is going to be – whether it’s up or down – but we know throughout history the next 100% is up.”
SOURCES:
1. What is inflation and how should it affect investing. September 7, 2022. https://www.investopedia.com/ask/answers/what-is-inflation-and-how-should-it-affect-investing/
2. Understanding Purchasing Power and the Consumer Price Index. https://www.investopedia.com/terms/p/purchasingpower.asp
3. Inflation is cooling, leaving American Asking: What comes next? January 23, 2023. https://www.nytimes.com/2023/01/23/business/economy/inflation-turning-point.html
4. How Inflation Affects Your Retirement Plans. https://www.forbes.com/sites/chriscarosa/2022/07/18/determining-how-todays-inflation-impacts-your-retirement-ongoing-needs-tomorrow/?sh=1074a79940b5
5. 3. Figure Inflation into your Financial Plan. Feb 6, 2023. https://www.thestreet.com/retirement-daily/your-money/figure-inflation-into-your-financial-plan
DISCLOSURES:
This content is based on the views of Matson Money, Inc. This content is not to be considered investment advice and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision.
This content includes the opinions, beliefs, or viewpoints of Matson Money. All of Matson Money’s advisory services are marketed almost exclusively by either Solicitors or Co-Advisors. Both Co-Advisors and Solicitors are independent contractors, not employees or agents of Matson.
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