Inflation Concerns? What Investors Should Do

There are not many words retirees, or soon to be retirees, fear more than the word inflation.  Inflation causes the erosion of purchasing power over time.  With no more money coming in the door from their paychecks, they have to sustain their livelihood from the portfolio they’ve accumulated (plus any fixed sources like social security or pension income).  If inflation is high, then you may need more real return from your portfolio to live the life you want to live.  Real return is defined as the return net of inflation.   

The U.S. Bureau of Labor Statistics said inflation hit 6.2% year-over-year in October.  It’s been trending upward of late though this is a backward-looking statistic.  A forward-looking forecast pegged to the 10-year US Treasury and 10-year TIPS, puts the interest rate at a more modest 2.56%.  Regardless, if inflation rears its big ugly head, you’ll be able to buy much less in the future with a $1 today.    


What to do if inflation shows up?

For most folks, investing in stocks is the most prudent approach.  Companies have flexibility to pass raw material price increases onto customers.  Value oriented stocks (usually) offer an even better proxy to fight outsized inflation.  I consider value stocks like the TJ Maxx of the stock market – good quality stocks at a discounted price.  Therefore, if you tilt your stock allocation to more value-oriented stocks, you are better hedged.  And the data supports this.  See the chart below provided by our friends at Dimensional Fund Advisors.   

As you can see, value stocks have more than doubled the outperformance of their growth counterparts in years with above-average median US inflation.  Our clients have a healthy mix of value stocks which should hold up well in inflationary times

If your portfolio is more fixed income heavy due to not needing to take much risk to achieve your retirement and legacy goals, then maybe an inclusion of TIPS (Treasury inflation protected securities) is a necessary addition.


Let us know if you are concerned about inflation and we can discuss the possible steps to adjust your portfolio.

About the Author: Alex Perkins

Alex is a Wealth Advisor for WealthPoint Advisors, LLC. After a successful career in management consulting where he helped business executives solve their corporate challenges, he decided to pursue a passion in helping families and individuals on the personal side. Alex now enjoys helping his clients answer their most pressing financial and life questions, through a comprehensive, evidence-based wealth management approach.