Worried about inflation? Here are 6 takes for retirement portfolios

April 6, 2022 10:02 PM

Panicked about inflation? A little perspective might calm things down.

With gasoline prices around $6 a gallon in California and stock and bond markets jittery about the economic effects of geopolitical tensions in Ukraine, the twin forces of higher prices and lower investment returns have investors worried about an erosion to their retirement nest eggs. It’s a concern that’s been absent for a generation.

As “The Best Strategies for Inflationary Times,” a recent Duke University paper, said, “over the past three decades, a sustained surge in inflation has been absent in developed markets. As a result, investors face the challenge of having limited experience and no recent data to guide the repositioning of their portfolios in the face of heighted inflation risk.”

With consumer prices up 7.9% in February, the highest in 40 years, here’s what six financial advisors, investment analysts and wealth management experts and executives say about the “hidden tax” of having to spend more money for fewer goods and services.

Temporary vs. persistent

Matt Dmytryszyn, the chief investment officer at Telemus, an independent advisory firm based in Southfield, Michigan

“We are looking to differentiate between temporary (near-term) versus persistent inflationary hedges for a portfolio. Assets such as commodities, precious metals or natural resource equities can benefit from near-term surprise upticks in inflation. The challenge with these assets is that they have higher, equity-like risk profiles that can add downside risk to portfolios if they aren’t timed right.

“We believe a small allocation to these assets to be a prudent means of protecting against nearer-term surprises in inflation. Adding assets such as real estate and infrastructure can help combat a more persistent bout of inflation, but they’re not able to reprice as quickly as commodities.

“The challenge is that the valuations of some sectors have already priced in higher inflation to some degree. Some segments of the real estate market are selling for record low capitalization rates and requiring multi-year double-digit rent growth to justify a reasonable return. Infrastructure assets, on the other hand, remain more attractively valued and possess the ability to reset prices in response to higher inflation.”

Rotate

Brad Roth, the chief investment officer at THOR Financial Technologies, a company that provides independent advisors with suggested asset allocations and weightings

“We’ve seen an increase in advisors rotating out of bond ETFs inside of their core portfolios. We’re also seeing an increased interest in hard metals such as gold and are fielding a lot of questions surrounding Bitcoin exposure. Advisors have started to open up to the idea of holding only equities inside client portfolios and marrying it with guaranteed income products, such as annuities, to offset the overall client risk.”

'What-if" scenarios

Brett Bernstein, CEO and co-founder of XML Financial Group, an independent advisory firm in Rockville, Maryland

“I think that while inflation is certainly front and center today, proper planning should be using historical averages for inflation. This is not currently causing immediate concerns for those looking to retire. As it relates to asset allocation, inflation and a rising interest environment have allowed our firm to make strategic tweaks to our strategy utilizing inflation and floating-rate bonds, more value equities, as well as the financial sector.

“For retirement drawdowns, we have always done planning by looking at various ‘what-if’ scenarios and utilizing tools like Hidden Levers to stress test portfolios for a variety of scenarios. Having said that, neither returns nor interest rates nor inflation are a linear number. We strive to look at averages over time on a very conservative approach. While this time may feel different…things tend to revert to a norm. To me, this time will be no different.

“One thing we have been doing is adding TIPS (Treasury inflation-protected securities, or debt securities whose value grows when inflation rises) to clients’ portfolios. As with interest rates rising, we have been adding more to financial, value stocks and floating-rate bonds.”

The longevity conundrum

Joe Camberato, CEO of National Business Capital, a small business financing company in Bohemia, New York

“Inflation is having a big impact on people’s retirement planning, and the old-school way of selling your stocks at 65 and moving into safe bonds will probably not be enough to get you through retirement. You have to consider equities and additional alternative investments that will give you enough returns to make it through retirement properly, but what no one is talking about is the fact that we are living much longer today. So, you really have to take into account how much you will need if you live to 100 years old or even older than that.

A new risk for a new generation

Michael Finke, director of the Granum Center for Financial Security at The American College of Financial Services, a nonprofit educational institution for financial advisors

“Over 20 years, retirees have historically lost over 70% of their purchasing power in previous inflationary periods. This is a risk that recent retirees haven’t faced, but that tomorrow’s retirees are likely to experience.

“Uneven inflation benefits retirees who can be more flexible about spending on categories such as gasoline and cars, which have had the biggest price spikes. Prices on healthcare and medication have not risen significantly” in the current inflationary environment.

The stock-bond correlation

When inflation is absent, stocks and bonds tend to move independently of each other. But when consumer prices rise, they move more in tandem. A rising stock-bond correlation can suggest that investors are worried about inflation.

Morningstar chartered financial analyst Amy Arnott wrote in a March 14, 2022 note that “an extended period of higher inflation would likely be negative for both stock and bond returns, potentially increasing the correlation between the two asset classes. In fact, correlations between stocks and bonds moved into positive territory in 2021.”

But, she added that “investors probably shouldn’t expect a dramatic rise in correlations unless consumer prices continue increasing at a rapid rate for at least three years. But at the same time, the deeply negative stock-bond correlations that we’ve seen over most of the past couple of decades may not be repeatable, either. If correlations between equities and fixed-income securities remain above zero, that would reduce the diversification benefit from adding bonds, which could be exacerbated by lower returns if interest rates eventually increase."