Persistent inflation may be an investor’s primary long-term risk. Inflation is the erosion of the purchasing power of your money over the years. Over time, your savings will buy less, not more.  While the elevated level of inflation that we’ve experienced over the last couple of years is concerning, over time, the truth is that ever-present inflation, even at a more modest level, requires important planning to manage.

Many of my initial discussions with prospective clients occur as they’re approaching or at least considering retirement. Among that group, a common perception is that they no longer have the time horizon to take on risk. Many people entering retirement are inclined to think that they should move all or most of their savings to the most stable investments, like cash or an equivalent.

While it’s true that your asset allocation may need to change over time as your demands evolve, it’s misguided, in my opinion, to believe that your portfolio assets will be secure sitting dormant. Without adequate growth, the purchasing power of your assets will decrease as inflation eats away at what you can buy with your savings over time.

Even though putting a large portion of your savings in cash may insulate you from the psychological stress of the short-term gyrations of the market, it leaves you exposed to a slower but much more certain risk of persistent inflation. Unfortunately, cash isn’t likely to generate a sufficient rate of return over time to keep up with that inflation. So it’s important for almost all investors, regardless of their stage in life, to keep at least some exposure to growth assets.

Recommended Ways to Manage Your Portfolio

Diversification and active portfolio management are crucial to combat persistent inflation and to avoid the risks of trying to time the market.

Market returns are irregular, and a successful long-term strategy really needs to respect that. While the appeal of moving in and out of the market to avoid downturns and to capture upturns is appealing, you need to be cautious. If your timing is not precisely accurate — both exiting and entering the market — the implications can be drastically negative.

When you’re considering moving in and out of the market as a strategy, it’s critical to realize that the best days often come very close to the worst days. Unfortunately, if you respond to that natural emotional tug to withdraw your money on the bad days, history shows us that move could very well result in a disappointing financial outcome. While we at Altfest believe that actively managing your portfolio and making changes based on the prevailing conditions is an important risk mitigation tool, we think it’s important to be measured, objective and to avoid emotional responses.

To build a diversified portfolio that can last you a lifetime, we recommend combining a variety of different investments in varying proportions, based on your financial objectives and your risk tolerance. At any given point, our investment team recommends to clients a variety of investments that we expect can generate attractive returns over the intermediate to long term. But over the shorter term, this variety of investments is intentionally designed to buffer clients from the booms and busts that you would get from a portfolio more concentrated in narrow segments of the market.

Combining diversification and active management we think provides a robust way to combat inflation with a strategy that can reliably be expected to work in different market conditions.

Find Out More

At Altfest, we strive to understand who you are and what matters to you from the first consultation. We want to learn about your concerns and gather information that allows us to identify ways to reduce risk across your financial life. Then we’ll put together a road map to help you get to where you want to go.

If you’re not yet an Altfest client, please book some time for a complimentary consultation.

 

 

Investment advisory services provided by Altfest Personal Wealth Management (“APWM”). All written content on this site is for information purposes only. Opinions expressed herein are solely those of APWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.