Is it Good to Invest During a Time of Inflation?
investing-my-money | Read Time: 3 minutes
By Charles O. Posnecker IV, CFA, CFP®, CTFA | Published: March 2022
Inflation has been front and center in the news this past year. Anyone that has tried to purchase a used car, a home, or even a steak can attest to a marked increase in prices and limited supply, resulting in a great deal of frustration. It has also caused worry and speculation around how much further inflation could rise and how long it will stick around, with echoes of the 1970s arising.
To be sure, some inflation is good. Indeed, the Federal Reserve actually targets an inflation rate of 2%. This makes sense–if most goods were actually declining in price, then consumers may wait to purchase them, possibly for an extended period of time. Companies may then be less inclined to make some goods, or worse, may not be able to stay in business. With some modest inflation, consumers aren’t impacted significantly. Consumers may then be more inclined to buy now, and companies can remain profitable.
While increased inflation may put a dent in your pocketbook, it is also something to consider within your investment portfolio. In an inflationary environment, fixed income is impacted the most, particularly with the low rates in recent years. The low yield you may be receiving is locked in and your purchasing power erodes quickly.
There are other options, such as TIPS (Treasury Inflation-Protected Security) and Series I bonds to consider. TIPS perform best when actual inflation is above expected inflation but will underperform if the opposite happens. Series I bonds will maintain purchasing power and adjust over time with inflation. The downsides are that they can only be purchased in relatively small increments per year and can only be held at the U.S. Treasury, not in a traditional brokerage account.
When inflation is prevalent, it is best to focus on investments that are durable and can adjust to increases in prices. These include blue chip stocks and real estate, either directly or indirectly. With stocks, the focus would be on companies that can pass any price increases on to their consumers. Think of a company that is beloved by consumers that would buy their products almost regardless of the price charged. Such a company may raise monthly subscription or memberships costs by a few dollars and actually come out more profitable than before. And similarly with real estate, property owners in crowded markets can simply increase rents paid.
Conversely, companies that have vulnerable margins or face stiff competition may be dramatically impacted by inflationary pressure. You may also hear talk of gold or cryptocurrency as possible hedges. Recall however that neither of these actually generate earnings or pay a dividend.
For those that were around to experience inflation in the 1970s, it certainly was a worrisome time. You should not, however, let it materially impact how you invest your portfolio, as history shows that in the long run, stocks move up and to the right. Your investing principles should remain virtually unchanged regardless of the inflation rate. Keep some cash on hand for emergencies and short-term expenses, with the rest invested in a balance of stocks and bonds depending on your time horizon and risk tolerance. If anything, do not attempt to “take hold of the wheel” yourself and make an investment decision during times of stress. Speaking with a good financial adviser can be a voice of calm in such an event.
About the Author – Charles O. Posnecker IV, CFA, CFP®, CTFA
Chuck Posnecker joined Cypress Capital Management in 2017 after working for Christiana Trust, a division of WSFS Bank, for 12 years in their personal trust and investment groups. He graduated from the University of Nevada, Las Vegas, where he received his BSBA in International Business (2002) and MBA-Finance concentration (2005). Chuck is also a graduate of the Pennsylvania Bankers Association School of Trust, Investments & Relationship Management, where he completed a three-year program focused on various aspects of trust administration and investments. Chuck obtained his Certified Trust & Financial Advisor designation in 2011, his Chartered Financial Analyst designation in 2016 and earned the CFP® certification in 2019.
This article is provided by Cypress Capital Management, LLC ("Cypress" or the "Firm") for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this presentation is derived from sources that Cypress believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.
Cypress is an SEC registered investment adviser that maintains a principal place of business in the Greenville, Delaware. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from registration requirements. For more information about Cypress’ registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.advisorinfo.sec.gov. Cypress is wholly owned by WSFS Financial Corporation.
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