There are a lot of complicated inflation scenarios being described in the Yahoo Finances and Forbes of the world, but to the everyday investor the worry is very simple: they’re concerned that they’ll no longer be able to afford the everyday items they’ve budgeted for.
This is true for the younger investor as well as those nearing retirement. For the younger crowd, they’re seeing price increases that they haven’t experienced in their lifetime. For the older group, they’re probably having flashbacks to the runaway inflation of the 1970s.
With all the speculation throughout various news sources, I’ve decided to get out my trusty Financial Advisor Crystal Ball which will communicate to me the questions you have on your mind.
Hang on, let me straighten my turban.
Is this the result of the pandemic, or more permanent?
Everything right now seems to point to the current high inflation being due to major demand for products coming out of the pandemic, combined with supply chain bottlenecks. Most experts expect these imbalances to even out pretty quickly.
Will this be crazy inflation like in the 70s?
Probably not, as the Fed seems to be taking a more active role in managing interest rates than in the past.
Should I expect a bigger raise to compensate?
Employers don’t seem to be quite ready to increase wages, thinking instead this is a temporary phase.
Are there any investments I should avoid right now?
Anything that will lock you into a low rate for a long time, such as CDs, annuities, and long-term bond purchases. If inflation remains high, the Federal Reserve may raise interest rates. This means that the value of the investment in which you are locked will be lower in value.
Are there any opportunities that can come from inflation?
If you have not refinanced your mortgage in the last few years, this may be a good time to do so while rates are still low. For those of you who are younger investors…money is not always this cheap. My first mortgage in 1998 was 7.75% and I remember being really excited that I got in under 8%. If inflation continues to rise and isn’t just the result of the pandemic, mortgage interest rates, that is the cost of borrowing money to buy a home, may increase and could be significant.
Okay, I’ve stashed away the crystal ball (to be brought out again during Oscar season) – but I have one last thought to leave you with. Long-term investors concerned about inflation don’t need to make any changes to their portfolios right now. If you’re positioned correctly (and have worked with an advisor – hint, hint), you should be diversified enough to weather this inflationary period.
The only way to ensure that you will LOSE money to inflation is to get out of the market or hoard your savings/cash.
That’s something even my crystal ball can’t fix.
