As the country experiences its highest rate of inflation in 30 years, financial advisors are facing a barrage of questions from clients. How bad will it be, and how long will it last? What does it mean for my finances and for my investments?
And inflation could get worse if new Covid variants further strain global supply chains, scare away workers, and crank up consumer demand for stay-at-home pursuits like home improvements and exercise equipment. For this week’s Big Q, we asked a cross-section of advisors: What advice are you offering clients about inflation?
Photography by Tara Flannery
Dean Harman, managing director, Harman Wealth Management: Inflation has been here for a year; it’s been 2%, 3%, 4%, but people are starting to really feel it now. We are moving to the point where inflation is not temporary; the Fed will likely have to raise interest rates to get it under control. From an investing standpoint, we were concerned five or six months ago and positioned portfolios accordingly. We bought some commodities, but the biggest adjustments were in fixed income. We’ve been buying things that are less sensitive to inflation, like convertible bonds. A lot of fixed income is overpriced right now.
In an inflationary environment, the people who are going to win are those who have borrowed money. I was talking two days ago with clients who are buying a home, and my advice was to put the minimum down, finance as much as you can, and get a 30-year mortgage. They have the money for a larger down payment, but I told them to keep it in their portfolio, keep it growing. They are probably five years away from retirement and are thinking in terms of paying off the house. But I told them all the rules that your parents went by are out the window.
Elizabeth Mannen Berges
Photography by Stephanie Zettle
Elizabeth Mannen Berges, advisor, Wells Fargo: Inflation clearly is one of the biggest risks to a portfolio today. And people ask about it constantly. Their first question is, is it temporary or is it permanent? And my answer is both: The transitory elements of inflation might include food and energy and autos; those things are going to straighten themselves out by the first half of 2022. But we’ve got some issues [longer term]. Green energy is definitely more expensive. There are wage pressures, and global trade is getting tougher. Those are some of the things that make the long-term inflation outlook not as rosy. We’re used to 2% inflation; I think we need to get used to a number closer to 5%.
So how does that play out for your portfolio? You always have to take into consideration risk tolerance and time horizon. You have to look at how many years you have until retirement, how many kids you have to put through school, and things like that. I think most people need to look at an allocation to real assets, and most people are going to do that through ETFs. So you’ve got to decide whether you’re going to take that from equities or bonds. And if you had an allocation to real assets of 5%, maybe you’re going to 10% or if you had 10%, maybe you’re going to 20%.
Courtesy of Destination Wealth Management
Michael Yoshikami, CEO, Destination Wealth Management: You need to prepare for higher inflation, but not as high inflation as people are concerned about. I think inflation will settle down next year and probably be around 3%. It remains a good time to refinance your mortgage; rates are still very low. And it might be a reasonable time to take home-equity lines to pay off higher-rate credit cards.
From an investment standpoint, keep durations below the average of the bond market, and make sure you have at least good or very good credit quality. It’s probably not necessary to be 100% triple-A credit quality, and flexibility can actually help you get more yield. Inflation between 2% and 4% tends to be an OK environment from an equity standpoint, and we think that that’s probably where inflation is going to settle in next year.
We’ve already shifted money into companies that have pricing power, and companies that have strong intellectual property. We think it makes sense to be involved in the technology or pharmaceuticals sectors. We also like financial services with high dividend rates, and higher net-interest margins. When interest rates actually go up, those factors will helpful from a profit standpoint.
Courtesy of NGP Financial Planning
Michael Policar, founder, NGP Financial Planning: What I’m telling clients is, “Don’t panic, this happens, we just haven’t seen it in a long time.” I think the numbers are going to be somewhere in the 4% to 5% range for the year, which is something we haven’t seen since 1991. But I don’t see it being like the ‘70s and early 80s, where we had 10 years of 4%-plus rates of inflation. Inflation may stay elevated for another year or so, and then will probably start to come back down and level out.
I’m telling clients to not pay off their mortgages. I told one client last week, “I know your goal was to pay off your mortgage before you retired. But given your interest rate, which is below 2%, don’t be in a hurry to do that.” As far as investments, I don’t want to trade based on inflation. What I want to own now is pretty much the same as what I’ve always wanted to own: companies that have strong balance sheets, and pricing power.
Courtesy of Ameriprise Financial
Nancy Daoud, advisor, Ameriprise Financial Services: Unprecedented actions have occurred: Lockdowns, trillions of dollars being printed and potential legislation involving tax increases and more entitlements, which leads to more dollars being printed. There is no real precedent for this scenario, making what’s to come uncertain.
Over the next 12 months, we expect that the stock market, which we believe is currently undervalued relative to earnings, will likely continue to go up. Inflation will continue as we recover from the pandemic. It’s unlikely prices will go back to pre-Covid levels, but they may stop going up so rapidly, which should be good for consumers. We’re investing in commodities and real estate to offset the declining value of the dollar. We also anticipate slower economic growth past 2022, with interest rates rising. As always, my advice to clients is to focus on their own timeframe and risk tolerance, regardless of economic conditions, and to continue to take precautions to prepare for the certainty of uncertainty.
Editor’s Note: These responses have been edited for length and clarity.
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