Judging by the papers, politics and general discourse we are observing lately here at Cedar Point Capital Partners, it's clear that inflation is the word, argument or zeitgeist of the moment.
It’s certainly understandable. Inflation hit a 40-year high of 8.5% in March, pushing up the price of everything from labor to lunchmeat. As of this writing, gasoline is well over $4 a gallon, and Moody’s recently estimated that the average household is now spending $350 more a month on the same goods and services than they did at this time last year.
That’s real money that requires real budgeting and spending discipline to counteract. And, frankly, that’s scary to a lot of people.
Protecting your investment portfolio from inflation requires discipline, too, but in a different way. While few households can generate more income as needed, a properly allocated and diversified portfolio of assets can grow and outpace inflation, giving you a hedge when your cash position is losing ground. But doing that that requires a real commitment to your financial life plan—an equally scary task when facing economic conditions we haven’t experienced for more than a generation.
That’s where we can help.
As fee-only fiduciary advisers and proponents of evidence-based investing (EBI), we focus on building our clients a diversified portfolio that spreads risks across asset classes and time horizons, without the need for constant changes or hedges.
That means you can rest easier and focus on the things in your life that really matter, rather than micromanaging your portfolio. If that sounds too good to be true, it’s not. It’s just EBI.
Evidence-based investing vs. inflation
The tenets of evidence-based investment teach us to rely on empirical evidence and historical data when picking our investments, not the current issue(s) of the day. That allows us to make logical, informed choices about our portfolio, rather than overcorrecting with an emotional decision.
We know that inflation, like most other things in the market, moves in cycles. While individual investors and big fund managers have both been busy searching for inflation hedges, the truth is we don’t know how long this current bout will last. Some market watchers have suggested that our current elevated level could last longer than most expect, but what does that mean? One year? Two?
The Federal Reserve, meanwhile, has been pushing interest rates higher in an effort to break inflation’s grip and cool the economy. While officials are publicly hopeful that gradual rate increases won’t tip us into a recession, history shows that's very much a possibility.
If you’ve been spending your time searching for inflation hedges and then a recession hits, will you be prepared for that? Or will you just make another quick pivot to try and respond?
Unfortunately, as EBI teaches us, that’s when you’re likely to make the most costly decisions with your money. We know your odds of beating or timing the market are slim to none, so why even try?
A properly allocated and diversified investment, meanwhile, is designed to maximize your returns over a longer term—say 10 to 20 years—meaning short-term challenges like high inflation or a recession carry less risk. By holding an array of assets, from equities and bonds to real estate and commodities, you can better protect yourself from sector downturns and unforeseen situations.
What if my investment time horizon is shorter?
That’s not to say there’s nothing to be done about inflation. For our clients with a shorter time horizon or a specific financial goal, it might very well be appropriate to develop a specific hedging strategy to minimize inflation's bite in the near-term.
That could include purchasing specific assets or asset classes that have historically fared better during periods of high inflation, including:
- Series I Savings Bonds, issued through the U.S. Treasury with interest rates generally tied to inflation
- Treasury Inflation-Protected Securities (TIPS), a type of government security indexed to rise (and in theory fall) with inflation
- Public Equities, particularly among mid- and large-cap companies
- Real Assets, whether that’s real estate where you can increase rents, or commodities like oil or grains
While individual investors can certainly hit the open market and buy any of these as a standalone hedge, they’re much more effective when used as a component of a properly diversified portfolio.
As fiduciaries and an EBI-focused firm, we can help you make decisions on what is most appropriate for your portfolio based on your time horizon, risk tolerance, life situation and other considerations. We can also reallocate your assets thoughtfully as the economic climate changes, keeping you on track for your bigger goals without having to sweat the small stuff. And isn’t that why you hire a fiduciary adviser in the first place?
We’re here to help you build a holistic capital plan that’s ready for today’s inflation and whatever the market decides to throw at us tomorrow. Give us a call today for a free consultation, and let’s grow together.
The commentary on this blog reflects the personal opinions, viewpoints, and analyses of Cedar Point Capital Partners (CPCP) employees providing such comments and should not be regarded as a description of advisory services provided by CPCP or performance returns of any CPCP client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this blog constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Cedar Point Capital Partners manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.