Don’t forget about Inflation!
18 May 2016
Inflation has been forgotten about the past few years. However, there are signs it may be creeping back into our lives. The annual consumer price index for March 2016 rose 2.2% following February’s 2.3% increase. I doubt we will see “runaway inflation” like we saw in the 70’s; however, it’s a good time to have these discussions now with your advisor. Many believe inflation will begin to erode portfolio returns as soon as this year. Most experts dispute what happens to individual stocks and bonds with rising inflation. The key is not really what each asset class will do, it’s how YOUR portfolio will return and if that return accomplishes your investment “fair rate of return” goal. The key is having many investments that move in different directions and making sure you have your “buckets” filled appropriately (see PII Buckets System). The liquid bucket (#1) will usually lose to inflation, but that’s ok. That particular bucket is 100% liquid and accessible. Your income buckets and growth buckets (#2 and #3) will provide the best hedge against inflation and this represents about 90% of your portfolio. Here is a hypothetical example of how inflation can hurt your returns:
Gross CD investment return: +2%
Less inflation at -2.2%
Return -.2% (negative rate of return on a +2.2% CD! How can this happen?–It’s gets worse)
AND don’t forget about taxes! If this money is in a non-IRA account, you have to pay Uncle Sam as well. Inflation is on the way back, so make sure you add this topic to the list of concerns at your investment review meetings.
The example in this article is hypothetical in nature and for illustrative purposes only. Return assumptions do not reflect the deduction of any commissions, or fees or product charges that may apply to any particular investment. Deduction of such charges would result in a lower rate of return.