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If the recent price of meat has made you contemplate veganism, you're probably witnessing the effects of our country's recent inflation surge in 2021.
There are practical ways to hedge against inflation, but the psychological component is probably the hardest part of this endeavor.
While we've seen people prosper through various market cycles, we've also noticed some costly habits that can be easily avoided. I've consolidated 3 of the most common habits to avoid during an inflationary environment.
- Avoid holding unnecessary excess cash in an inflationary environment. It's losing value.
- Avoid timing the market. The only thing certain is that markets are uncertain (regardless of inflation in 2021).
- Let history be a framework, but not a map to the future.
- Ensure your investment strategy aligns with your goals and time horizon.
Here is the data everyone is talking about...
According to the US Labor Bureau of Statistics, the all items index rose 6.2 percent for the 12 months ending October 2021, the largest 12-month increase since the period ending November 1990.
CPI YOY Index (US CPI Urban Consumers NSA) Monthly 10NOV2015-10NOV2021 - Koyfin Data
There have been a number of instances in my own life where I've felt this inflation surge.
For example, it takes $80 to fill my Chevy's gas tank (previously $50), my rent has gone up 9%, and it feels like my groceries have doubled in price.
For economic geeks, the data is available in the report above, but I think Michael Scott summarizes it best below...
Nevertheless, here are 3 habits to avoid when inflation is high.
Holding Too Much Cash (Inflation can eat this away in 2021).
Being a diligent saver is a good predictor of long-term financial success, but having excess cash can lead to loss of value over time.
When prices push higher, your money doesn’t go as far — especially for those on fixed incomes, like retirees.
Over the past 20 years, even with a moderate 2% inflation rate, inflation would cut your purchasing power in half.
The longer you wait to construct a plan, whether fully invested or sitting in cash, the more you allow inflation to creep in and rob you of purchasing power.
Consider your goals and time horizon, and figure out a cash reserve that works for you.
In the meantime, here are a few strategies our clients are currently using with their cash:
- Open a High Yield Savings account: If you’re a retiree who prefers a higher margin of safety, you’re none too pleased with current rates. Despite the fact that there aren't many great alternatives out there for holding your cash and many "high yield" savings banks are still only yielding .5 percent. It still beats your checking or savings accounts' .01 percent.
- Stay Invested: The easiest way to become a victim of inflation is to stuff cash under the mattress. Inflation does not spell disaster for investors. Instead, the goal of investing during a period of inflation should be to preserve portfolio buying power and stick with your investment plan.
Trying to time the market
Is inflation transitory? Is it here to stay? Where should I invest my money at this moment?
Investors waste far too much time trying to find the perfect entry point for their investments. Especially when headlines read "Highest inflation in 30 years".
You can probably find thousands of articles with a simple google search telling you where to invest.
The "perfect investment" will only be known with hindsight. It's impossible to successfully pick winners over time.
Simple investment strategies can work, but they require a disciplined mindset and tolerance for short-term pain.
" Pain is temporary, long term capital gains are forever" - Unknown Great Philospher
From the pandemic lows of March 23, 2020, the S&P 500 is now up a hair over 111%:
SPY (S&P 500 Index) Monthly 23MAR2020-31OCT2021 - Koyfin Data
The main takeaway here is that when others panic, stick with your investment plan. Those that were skittish investors in March of 2020 realized this the hard way.
This shows the importance of sticking with your investment plan through the ups and downs.
What investors need is a process that helps cut through the noise of "panic."
Relying on past performance
"Things that have never happened before, happen all the time." - Morgan Housal
History is the study of surprising events. But historians often use history as a guide for the future. Which seems counterintuitive right?
We can use history to study where people went wrong, and what tends to work during inflationary environments. But it is not a perfect map to the future.
Often touted but not often taken seriously is the saying: past performance is not a guarantee of future performance.
We often tack this onto investment content because it's TRUE.
It’s easy to get excited when a particular stock or fund had performed well during historic times of inflation, but it doesn’t mean it will reign true in the future.
Unlike geology, where a scientist can trace back millions of years, finance is not hard science. Yes, there are a lot of numbers and data, but finance is largely driven by surprises.
The most obvious takeaway here is that inflation will happen many times throughout our lifetimes.
I really don't know if it's here to stay or on its way out. But past performance is no substitute for how inflation will play out in the future.
Bad habits are inevitable. Knowing what they are, when you're committing them, and how to avoid them will help you succeed.
To avoid committing the mistakes above, develop a thoughtful, systematic plan, and stick with it.
People contemplating major investment decisions should contact their financial advisor
© 2023 Matt Calcagno
All content and opinions expressed on this site is for general informational and entertainment purposes only and is not intended to provide specific advice or recommendations for any individual or on any specific security. This content is only intended to provide information and education about the financial markets and financial planning strategies. To determine which investments may be appropriate for you, consult your financial advisor.