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Is Inflation Outpacing My Portfolio? Thumbnail

Is Inflation Outpacing My Portfolio?

Today, I wanted to talk with you about one item that's on everybody's mind these days and that's inflation. We've got some outlandish numbers with headlines reporting 6% and 7%.  If you've been to the grocery store, it feels even worse than that. 

So, let's talk about what that means long term.

If you're near or at or in retirement, you may be starting to feel anxious. Some of our clients have come to us and said, wait, we're only factoring in 3% inflation, what are we going to do? We got 7% inflation! It's a valid question to ask. 

Setting an Inflation-Based Goals for Your Portfolio

Usually, when we're running forecasts, we’re looking somewhere between a 5.5 and a 6.5% rate of return expectation and then a 3% inflation. We're usually talking about inflation plus somewhere between 2.5 and 3.5% returns is what we need to get out of the portfolio.

So if we got a 6 or 7% headline inflation number, what we really need to do is look back at the overall portfolio performance. More specifically, we look at your equities allocation. What we're likely going to see is that the equities allocation did way higher than that 6 or 7% number. As a result, the overall portfolio likely still beat  inflation by more than that 3% - that 2.5 to 3.5% margin that we need. So we don't want you to worry about headline inflation.

The short answer is we need to focus on having the portfolio outpace inflation by at least 3%.

We factor in 3% inflation over long periods of time. If you think about inflation over the course of the last 10 years, there hasn't been a whole lot. Just because we are getting some kind of "catch up" inflation numbers from over the course of the last decade, it shouldn't be caused for panic at this stage.

What Parts of My Portfolio Are Exposed to Inflation?

Despite the big picture perspective, we do think that we're going to continue to see scary, sometimes intimidating inflation numbers.  Here's where you do have direct exposure to in your portfolio (both to inflation and the risk of loss of capital in a rising interest rate environment):

  • Bond index funds
  • Bond index portfolios
  • 401k's
  • Stable Value Fund  (usually invested in 10 year T bills)

Now, if you've talked with us for any length of time about what's actually in your portfolio with us, you'll know that we have almost no exposure to that kind of bond index strategy.  We've thought for some time that with interest rates at all-time lows, there were really two things for interest rates to do

  1. Tread sideways in which we're not going to make hardly anything in those kinds of bonds or
    2. Trend up in which case, those bond index and investment-grade bond strategies are really going to lose money

We thought if two out of three possible outcomes with interest rates were going to be debilitating or dangerous for our clients, we've kind of steered away from those areas of the bond market.

Instead, we've used things like fixed index annuities, high yield municipal bond funds, floating-rate bond funds, things like that, that don't have as much direct exposure to the risk of interest rates jumping up or inflation factors.

Always Seeking Your Best Interest

Here at Vizionary Wealth Management, we're always here with perspective for the decisions ahead. If this has been helpful, please feel free to give us a like or pass it on. And if you have any questions about your portfolio or areas that we can help with, please don't hesitate to ask.