1. Consider adding some inflation-resistant diversity
Though the rise in inflation may be troubling, investors who already have a well-diversified portfolio of traditional stocks and bonds may already have some degree of protection, as portfolios such as these have historically tended to grow even in periods of high inflation. We still believe that a mix of stocks and bonds can help investors experience growth while managing risk. Corners Financial Planning, LLC has taken specific steps within client accounts to help provide additional inflation protection, emphasizing certain investments that have historically done well in inflationary environments. This has included adding diversified commodities, such as energy, industrial metals, precious metals, and agricultural products, as well as real estate stocks and international stocks.
2. Take a close look at your budget
Consider what's driving inflation and see if you can shift what you're spending your money on, so it has less of an impact. It may be wise to defer purchases of consumer goods that have been particularly affected, such as used cars and furniture, or groceries like pork and bacon, all of which have experienced double-digit year-over-year price increases.
3. Don't get too comfortable in cash
In times of volatility and uncertainty, it can be tempting to retreat from the market and reallocate some of your assets into a cash position. But in an inflationary environment, holding cash can be counterproductive. It feels safe-because the number in your account appears to be staying stable. But the longer it sits there, the lower your purchasing power can get. Additionally, taking money out of the market can have a substantial effect on long-term performance. Missing out on only the market's 10 best days over roughly 4 decades has historically reduced wealth by as much as 55%. Investors who can take on even just a bit of risk will typically have a better chance of keeping up with, if not passing, the rate of inflation.
4. Reassess your emergency fund
However, some investors may want to keep more cash on hand in their emergency fund to account for the rising cost of living that comes with inflation. While it may not be wise to leave a lot of invest-able assets in cash-it's still important to be prepared for any short-term liquidity needs. Because prices are rising, you may want to add to your emergency fund, to help ensure you're able to cover the costs of an unexpected expense should one arise. It's generally recommended that you set aside enough to cover 3 to 6 months' worth of expenses. If you haven't taken stock of how much your day-to-day expenses are really costing you, your emergency fund may not be ready when you need it most.
5. Reduce your tax drag
Taxes are one of the main drags on portfolio performance. The more tax-efficient you are, the better off you're going to be. By taking advantage of market volatility to engage in tax-loss harvesting and properly locating tax-inefficient investments in the appropriate tax-deferred or tax-exempt accounts, you can potentially lower your overall tax bill, which can help offset the bite of inflation. Corners Financial Planning, LLC considers tax efficiency one of the key areas to help you make alpha with regards to your investment returns.
The best defense is a good offense
There's not a one-size-fits-all answer. The best course of action is going to depend on your level of wealth and your stage of life. But having a good, robust financial plan can provide some comfort when the markets seem uncertain. In this environment, being too defensive or having too much of your assets in cash may be particularly risky. While we do believe inflation is likely to moderate from recent levels, this may take a number of quarters to unfold. And though there are a lot of question marks out there for investors— Ukraine, rising interest rates, recession concerns—there's a real risk that being too cautious might result in diminishing the purchasing power of your assets.