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What the Latest Inflation News Could Mean for Your Portfolio

What the Latest Inflation News Could Mean for Your Portfolio

June 17, 2021

With the ups and downs the market has experienced over the last year, you might have stock market fatigue - and all the recent talk about inflation probably isn’t helping.

While some investors might be looking at their retirement accounts with dollar signs in their eyes, others could be watching what’s happening with a little more trepidation.

In the 23 years I’ve been an advisor, I’ve never experienced inflation like we’ve seen in 2021. In fact, during my tenure as an advisor, inflation has been relatively low for the most part.

However, I know that when investors hear the word “inflation” a few of things might pop into their minds:

  1. Fear that their retirement income won’t cover everything they need it to.
  2. Worry about their existing bond holdings as interest rates rise.
  3. The possibility of a stock market crash.

So, let’s answer some of the questions you might be thinking and see if we can alleviate those worries a little.

Are we going to see inflation like we did in the late 70s/early 80s?

The Fed, who is tasked with keeping inflation in check, doesn’t seem to think so.  At this point, they have not taken action, but they are closely monitoring it.

How can the Federal Reserve impact inflation? 

Because they control the Federal Funds Rate, the Fed can raise interest rates.  What this will do is slow down an economy when it’s heating up too much.  Not all rates are directly tied to this - for example: mortgage rates - but they tend to respond to each other. 

How should I be changing my portfolio in anticipation of inflation? 

  • First and foremost, you want to make sure that you have a properly balanced portfolio.  This past year saw a lot of unexpected gains.  Are your large caps in your portfolio now too large of a percentage of the holdings?  It may be time to rebalance. 
  • Use portfolio managers who have the ability to pick and choose their holdings.  This means that I would underweight the use of index funds in my portfolio in favor of actively managed strategies.  For example, you may want a portfolio manager who can purchase TIPS (Treasury Inflation-Protected Securities) rather than a standard Treasury Bond.

A Few More Things to Keep in Mind

Inflation doesn’t mean all bad news and there could even be some opportunities for you. Some investors take advantage of real estate during times of inflation; however, if this is something you’re interested in, it’s important to be choosy. For example, we don’t know what the commercial real estate market will look like in the next few years with so many people continuing to work from home.

It’s also important to know what to avoid. I would think twice about purchasing a ten-year bond with a locked-in low interest rate. Yes, your principle could be guaranteed, but you might be better off purchasing a shorter-term bond and then investing in a longer-term bond when interest rates are higher.

If you’re an investor who is nearing retirement and are worried about what the latest market activity means for you, remember this:

  • An inflationary period is part of a market cycle. The market is forward looking; a lot of the pricing for inflation is already built in. 
  • A balanced investment approach is always best for the long term, and you can’t time the market.
  • If you are close to retirement, the normal shift is to have a higher percentage of bonds in your portfolio and to become more conservative. It may be too late to overload your portfolio with real estate or another commodity like gold or silver. 

What Do I Tell My Clients?

Trust your portfolio managers for the next few months.  We use strategies that give managers the ability to move the portfolio around to account for economic trends without an over emphasis on market timing.  They have the information that tells them if a particular commodity is over-priced or underpriced. They do the bond analysis.  When the market is going straight up, more than likely everyone is making money.  It is not until the tide goes out that we see who is swimming without a bathing suit on (I know – vivid image, but you get what I mean).  

The bottom line is that you know you’re covered when you invest in a balanced, actively managed portfolio. 


Cecilia Beach Brown Is a registered representative offering investment and advisory services through Lincoln Financial Securities Corporation, Member SIPC. Advisory Services are offered to residents of Maryland. LFS and its representatives do not offer tax or legal advice. Please see your tax or legal professional regarding individual circumstances. C Beach Brown, LLC, Pilot Financial Advisors and Lincoln Financial Securities are separate entities.  LFS-3638007-061821