A lot of us Palmdale investors are feeling the effects of inflation.
And I want to help you navigate through it as best I can. This week, I want to take some time to break down how it could be affecting your investment portfolio.
(But Rodney … I don’t HAVE an investing portfolio! Well, read on … this still affects you. And it’s our job to help you get to the place where you CAN and without Uncle Sam decimating it via taxation.)
In a weird way, the intense hit of inflation is actually bringing us together (even while many other things threaten to split us right down the middle).
If there’s any comfort while prices are rising and your hard-earned paycheck isn’t going as far as it used to, somehow knowing that everyone else out there is in the same boat makes the whole thing a little easier to face … at least a little.
And, while I can’t shift the market or make the gas prices any cheaper, I am here to help you and yours get through this time and make some smart decisions to help reduce your tax bill.
If you want to get an analysis of YOUR present situation, we’re happy to help. Just grab a time with me and my team at Premiere Tax Service here:
Now, let’s dive into the effects of inflation and your portfolio, what things look like and how you can make the right decisions moving forward…
Effects of Inflation: Plan for This, Palmdale Investors
“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” – Ronald Reagan
Inflation’s sting is obvious every time you stop to fill up at the gas pump or make your weekly grocery run. But how does it affect your nest egg?
When the cost of living and the price of everything rises (and quickly), it’s only natural to think of savings before investments – yet for many people, they’re the same thing. You can take right now though to not only recognize inflation’s effects but also make life easier on you and your long-term savings and investments.
Here’s what to look for.
Should you be worried?
Currently, inflation is happening at a rate of 8.6% year over year, superheated like it hasn’t been in four decades. Some say it’s easing, but not by much so far. The “experts” say inflation will average out to about 4.6% this year. We’ll see…
In the last 40 years, investments have come to represent most of everyone’s savings for long-horizon goals like retirement. Probably yours, too.
But what does Wall Street think of inflation? Oddly, inflation tends to bloat companies’ bottom lines, and so initially appears good for the stock market. That probably doesn’t make you feel good, though, when bread’s gone up a dime in one week.
And yes, inflation can create problems for the average investor like you and me.
You have less cash on hand to invest, for one, and before long you get the nagging sense that the returns on your investments aren’t keeping up with inflation. That can be a worry – especially if the inflation lasts a while.
What’s in your wallet?
If your investment portfolio is like most people’s, it contains stocks and bonds, (often in funds that are usually mutual funds, exchanged traded funds, or index funds that are built to mirror the market’s ups and downs). Maybe you also have real estate in some form, cryptocurrency, or precious metals like gold.
Portfolios can be conservative for the long haul, aggressive to make quick returns, or income-producing to give you money in your later years – portfolios can in fact vary almost as much as individual people.
Some of your assets might be in a brokerage account and you might think of some others as being in your retirement account, like a 401(k). But they’re both riding on the stock or bond markets. And inflation affects them both.
Let’s look at how inflation can impact different kinds of investments.
As we mentioned, it bites into returns – particularly when producing the real yield. Say a bond has a certain yield that when factored with the inflation rate produces a negative yield. In other words, inflation possibly gives your bonds’ yield a haircut to the point where you lose money. (As you can imagine, that inflation haircut cuts into the real return on your cash holdings even more.)
Inflation can impact the stocks, or rather the companies behind the stocks, too. Just take what inflation has done to your budget and magnify it to apply to a complicated set of finances like a company’s, where high prices can erode sales. Are you invested in companies that have to borrow a lot at now-higher interest rates? Down go the stocks – and your returns. Or are you invested in companies that can just pass most higher expenses on to customers with little hurt on the bottom line, and your stock?
Then there’s the time factor. If you’re close to retirement and ready to finally tap your long-term savings/investments, inflation’s hurt is worse since you see it more obviously on your returns/withdrawals.
Responses to inflation – upping interest rates, for instance, which the Federal Reserve just did – can also affect bonds as investments. Bonds don’t always do well when interest rates rise, though bonds with shorter maturities are generally less sensitive to changes in interest rates than their longer-term counterparts. Go over your holdings to see how many are tied to higher or lower interest rates. (We can help with this).
What else to look into
You may be tempted to zip your money in your mattress and clamp your hands over your ears while people keep screaming about inflation. We’re tempted, too, but remember what we mentioned about cash taking the hardest hit when prices rise a lot…
Wall Street has been crazy at times recently; we don’t blame any investor who feels skittish. But some stocks reputed for long-term potential (aka “value stocks”) reportedly do okay during inflation. Some investments are also supposedly designed to do better in inflationary times, such as inflation-protected index funds or Treasury Inflation-Protected Securities (TIPS), which pin their payout on the cost of living whether it goes up – or down. Don’t forget: This will pass.
Is there any real protection against the effects of inflation? Who knows? We do know these are scary days, but we can get through them together.
And we’re here to help Palmdale investors like you make hard financial decisions and make sure you’re on the right side of the IRS:
You’ve got someone you can trust fighting for you.
In your corner,