Upticks: Inflation and You

By Jake Falcon on August 6, 2021

Inflation is the decline of purchasing power of a given currency over time. With inflation creeping up, clients have been asking more about it and if they should be concerned. On this episode of Upticks, Jake covers the inflation rate since the 1970s, how we protect you, and how we manage our portfolio.

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Today, I want to discuss a topic I see being mentioned more and more in our client reviews – inflation.

As of writing this, inflation has crept up to around 5%. Inflation has not been this much of a concern since the 1970s – before I was even born. While I did not see the situation first-hand, I have been doing plenty of research. I recommend listening to this episode of Planet Money on NPR to see how they handled the situation then, but I will give you a few highlights.

Inflation in the 70s averaged around 6% but peaked at around 20%. This was likely a very frightening time for consumers. For a period, inflation was going up nearly 10% a year.

The big takeaway from this show was that consumer behavior is what really drove inflation. If someone was worried about the price of something rising, they would rush out to buy it right away. They assumed this hyperinflationary period would last forever, but their behavior hurt the situation rather than helped it.

The Fed’s initial response was gradual, but because of the widespread panic the approach failed. They eventually took drastic control over the money supply and reduced it greatly. It was a very unpopular choice at the time, but it worked. The Fed’s harsh control solved inflation at the cost of a recession.

How do we protect you today?

The good news about investing with Falcon Wealth Advisors is that any money you need more than 5-10 years from now is invested in stocks. Stocks, by nature, are inflationary and protect you against purchasing power risk – the risk that your dollars today will not be able to purchase the same goods and services in 10 years.

In my opinion, the best way to protect yourself against inflation and purchasing power risk is to have an adequate number of stocks in your portfolio. The idea is that if inflation rises and we see a rush to buy, the companies that make those products and services will see increased earnings. Ideally, their stock prices will also go up to ensure that while you are paying more at the cash register, you are also earning more on the stock market.

It is so important to have a diversified portfolio of stocks and bonds. It is how we protect our clients from a purchasing power risk standpoint. We speak with our clients about inflation during reviews and can run scenarios to see how their portfolio might play out at different inflation rates.

However, do not get too caught up in “what if’s” about inflation. Although the 70s were a volatile decade, inflation averaged out to around 6% for the period. Since we have seen so little inflation since then, inflation is to be expected.

How do we protect your portfolio?

We subscribe to and pay for Bloomberg research software. This software allows us to plug our portfolio into it and see how it might perform under a hyperinflationary environment. If we think inflation is here to stay, you will likely see us start to modify our portfolio to set ourselves up to profit the most from an inflationary environment. This is our role as portfolio managers, and we take it very seriously. If we need to make changes, my Research & Trading team and I will work to set ourselves up to protect our clients.

We believe in active management to best serve our clients.

Another way we protect our clients is by having a commodities allocation in their portfolio. Gold, oil, silver and other commodities typically do well during inflationary periods. This should also help our clients in a hyperinflationary environment.

Remember that inflation is not just running rampant, the Fed is mandated with controlling inflation, unemployment, and interest rates. It is crucial to pay attention to what the Fed is doing. There is an old saying, “Don’t fight the Fed.” You do not want to go against Fed actions. They control the monetary supply. We align our portfolio with their theme in order to get the most benefit out of Fed decisions.

If we do see a hyperinflationary period, we will get through it just like in the 70s. We are watching for change and are ready to make informed decisions to protect our clients. Remember that we have you preventatively covered through commodities as an allocation, and if we need to make changes to the portfolio, we will.

If you have any questions or concerns about anything I covered today, do not hesitate to reach out to me. I would be happy to answer any questions about or have a conversation on the topic. Email me at jake@FalconWealthAdvisors.com.

Clients choose to work with us to enhance their financial literacy and explain exactly what their financial plan means to them.

-Jake Falcon, CRPC®