Inflation is BAAAACK!
Most Americans were shocked and taken by surprise that INFLATION came back so suddenly.
Not only did the inflation numbers rise last year so quickly (up to nearly 9.2% in June of 2022) but the fast and firm reaction from the Federal Reserve raising interest rates aggressively has sent shock waves through our economy and our personal lives.
We have not experienced inflation since the early 1980’s, yet here we are again. The last time the economy was in a long-term inflationary period was 1968 to 1982. It’s possible that once more, inflation may be with us for an extended period of time. For this reason, I believe it is important that we women investors, interested in building and preserving our financial health and wealth, become “real smart, real fast” about inflation and learn what to do to thrive.
It’s easy to repeat mistakes when you may not be familiar with the basic things you can do to protect your money and to navigate inflationary times. You may not be sure what Inflation is and how much it will affect your finances. In this article, I’ll explore what Inflation is, what mistakes not to make, and how to get ahead of it.
Inflation, 2023 Style
All inflationary times have several things in common, including a rise in prices of all goods and services and a decrease in the buying power of the local currency, the dollar. But not all inflationary cycles are alike.
One common result is that the cost of living goes up as measured by the CPI (Consumer Price Index) and with rising interest rates, both mortgage costs go up while pressure on profit margins for corporations take a toll on expected earnings, which causes a price adjustment in the markets.
Those price adjustments are often swift and surprising. The stock market adjusted downward by 25-30% from its January 2022 peak in the first two quarters, leaving investors with a dazed bewilderment. Many household budgets, already fragile from the high use of debt, become precariously subject to further financial shocks.
What makes this 2023 Inflation different? The answer can lie, in part, on how long we expect inflation to last and whether we are in a period of rising inflation.
Three Inflation mistakes NOT to make.
One common mistake is called “Denial”. Often the shock of change is so swift that it makes investors overly smug, thinking this is just a small nothing and it will “blow over”. Some investors feel numb, and hide from the facts. I remember vividly hearing from a number of clients while I was an active professional money manager that they were not listening to the news nor were they opening their brokerage and bank statements, because they could not bear to see the negative numbers in reality in their declining net worth. Its common because people feel they have “missed the boat” and they feel helpless. This couldn’t be further from the truth.
NOW IS THE TIME TO GET PROACTIVE and take action to adjust for more inflation ahead.
Emotional Fear and Panic
The second common mistake is to succumb to the emotions of fear and panic. It’s normal to experience these emotions and investors, being human, are not exempt from reactions to fast changing price movements and sudden re-evaluations in the economy.
But its important that those emotions do not cause panic selling indescriminantly or fear-based reactions that are not well thought out.
Now is the time for thoughtful re-evaluation, rebalancing, and double checking that your assets are strong enough to withstand further inflation and even to prosper during inflation.
Being a student of business cycles gives us as women the ability to check our emotions so that we can be ready to step up and buy assets when the time is right. With heightened awareness and discipline we can smartly deploy our current purchasing power to get set for the next wave of wealth creation.
Over-purchasing (Increasing Debt) or Hoarding
The third common mistake is erroneous thinking that future price increases mean this is the last chance. Many people buy high ticket items in a FOMO mentality (fear of missing out) and often overextend themselves on debt. The opposite is also typical where people hoard supplies similar to what occurred during the pandemic.
With interest rates going higher during inflation, this is the time to decrease debts. The cost of borrowing money is the #1 key inflator. That cost alone will erode your future buying power more than any other factor. It’s important to reduce debt now more than ever. In addition, putting off purchasing large ticket items allows you stretch your dollars and increase your savings.
Inflation’s impact on Retirement
Inflation is one of the biggest obstacles to saving for Retirement. Seventy-six percent of workers and 73 percent of Millennials worry about Inflation’s impact on their retirement savings. The Federal Reserve has a goal to keep Inflation at a 2% rate. The long-term historic rate of inflation is 3%.
Many financial experts are calling for an extended time of higher inflation perhaps for a decade or more. This is a time to take action to make sure your retirement investments are appropriately diversified and include inflation hedges that increase in value to offset inflation. It’s important to get help from a qualified financial consultant.
Inflation and saving for College.
The cost of higher education continues to rise. Tuition and other costs are increasing at an average rate of 8% yearly. You can keep your college funds ahead of Inflation by using 529 Savings Plans which grow faster because they are tax free until withdrawal.
If your student is planning to attend College, there is still time to start thinking about saving for future expenses. A college savings calculator can give you a rough idea of what you can expect to spend in the future.
What Investments beat Inflation?
During Inflation, the assets that benefit in the long run are considered “hard assets” : real estate, property and land, precious metals like gold and silver, and collectibles, like art. These are considered “stores of value” meaning their value holds up over time.
Initially, a new onslaught of inflation causes a price shock to occur in the “liquid markets” such as stocks, bonds and commodities as investors scramble to re-evaluate the impact on earnings or how severely certain supply chains will be affected, including oil and gas and energy.
However, in the long run, inflation and its inherent upward spiral of prices is the ultimate factor that causes the stock market to rise over time. Thus, owning the highest quality companies in the markets over time is one of the BEST hedges against inflation that builds wealth sustainably and also offers the added advantage of liquidity, or the ability to sell when needed.
Certain sectors of the economy do best relative to other sectors, including Energy, Health and Medical, Consumer Staples, and Utiliies. The theory is that consumers must continue to spend monthly budgets on their basic needs. In addition certain income producing sectors like REIT’s (real estate investment trusts) also are in demand during inflation.
Traditionally, inflation protection bonds are some of the best places to invest your cash to keep pace with rising interest rates. Do your research at free websites like TreasuryDirect.gov to learn more about I Bonds – inflation adjusted I Series savings bonds, currently yielding high income rates. Also consider TIPS, Treasury Inflation Protection Securities whose interest rates adjust upward and downward with rising or falling interest rates, giving investors additional ways to protect cash investments from higher inflation.
Finally, commodities, especially gold and silver, are good hedges against future inflation. In fact most expert advisors and investment portfolio managers now include at least a 5% exposure to precious metals as an investment portfolio as a natural hedge. Gold and silver act as reliable substitutes for fiat currency during times of scare when the confidence in the dollar is eroded.
How do I cope with the threat of Inflation?
It’s safe to say Inflation is a reality that we all need to accept and learn about. To counteract the price spike, the Federal Reserve attempts to slow down the economy. It may be that this becomes a short-lived inflationary spike that is part of the normal cycle of business growth, contraction, and growth again.
The question of the moment is, “what is the best way to mitigate this?” Well, it’s not a bad question to ask, right? A little planning and foresight will allow you to protect your assets while you build a secure financial future. I believe what women want most is financial freedom.
As you consider the best course of action, remember to consider an advisor, someone who understands the markets, your needs and that you can trust. Let’s Chat
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DISCLAIMER: This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice. Investing involves risk, including possible loss of principal. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness.