Investors could consider strategies to inflation-proof their portfolio to withstand gradual increases in prices for goods and services.

Inflation matters, whether you are decades away from retiring or pursuing financial independence with the option to retire early. It can chip away at the wealth you have built and impact how you spend your money in the future.

Inflation and the new normal

You might have heard about the persistently high inflation of the 1970s from your parents or back in a class on economics. Talk of ’70s-style inflation resurfaced recently as prices for everything from groceries to gasoline surged during this post-pandemic recovery. However, we maintain that although the turbulence of the past era offers some important lessons, now is not like then.

Accumulating Wealth

These days, we believe the rise in U.S. inflation can be attributed to an economy reopening as COVID-19 pandemic restrictions loosened. Supply-chain issues and a boost in demand are major factors. The consumer price index (CPI), which measures the prices of a basket of common consumer goods, increased 5.4% in June 2021 from a year earlier.

Inflation causes the price of many things to go up, especially at the grocery store. According to the U.S. Bureau of Labor Statistics, a gallon of whole dairy milk cost less than $3 in 2001, and now costs well over that and closer to $4. This is just one example of a consumer item’s price that has increased during the past several years, showing how inflation affects buying power.

The purchasing power solution

The effects of inflation are not only seen in the grocery store. Inflation can slowly erode at savings over time. Investors with a long-term time horizon may not need to worry about the short-term impacts of inflation. However, they may need to build retirement funds that will keep pace, or even out-pace, inflation. If the desire is to grow the portfolio so that it covers the projected cost of inflation, and generate a positive real return (excess return after adjusting for inflation), then target objectives of 4% or more may be required.

Some investments have a strong reputation for performing well in an inflationary scenario. The classics include commodities, real estate investment trusts (REITs), and stocks. The issue for investors who consider income as an objective is that commodities pay no dividends, unless bought in the form of listed stocks, or interest income.

Dividend-paying stocks, however, offer an attractive opportunity for building or completing a portfolio designed for purchasing power. Historically, dividends have often been a reliable source of total return in a diversified investment portfolio. We believe stocks offer a lasting option to address the quest for purchasing power.

Additionally, low-risk investments like bonds can be affected by inflation. A longer-term bond has a greater risk that higher inflation could lower the value of payments in inflation-adjusted terms.

What to consider when talking with your Janney Financial Advisor

A knowledgeable Financial Advisor can help you create and monitor a portfolio to meet your objectives. A couple things investors can ask to start the conversation about planning for inflation:

• Is my portfolio properly diversified to produce consistent and reliable income?

• How can I effectively build my assets to help create a buffer for rising prices


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About the author

Mark Luschini

Chief Investment Strategist, President and Chief Investment Officer, Janney Capital Management

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