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Inflation – what to know and what to do

Rising inflation brings about concern for many, but Vanguard’s time-tested investment philosophy—and a long-term focus—can help any investor navigate choppy waters.

 What is inflation?

Inflation happens when prices rise and purchasing power decreases. This can be the result of a simultaneous high demand for and low supply of goods and services. Consumers have money and want to spend it, but since not enough goods are being produced, prices move skyward.

How has inflation affected the markets?

Inflation has been historically low for most of the last 40 years, so the level of inflation we’re experiencing now is unsettling. When inflation increases, interest rates tend to rise, which can cause both bond and share prices to fluctuate. This can be especially challenging for companies as they plan capital expenditures, budgets, and payrolls. For many investors, this could be their first experience with inflation and they may be wondering how to proceed.

When should I make a portfolio adjustment during high inflation?

In this inflationary environment, as with any period of high uncertainty, investors should reflect on their goals, time horizon, and tolerance for risk. If you determine that you need to make a change after that analysis, you should consider it carefully before making any sweeping changes (such as switching all your investments to cash). It’s important to put what’s going on into perspective and decide if it truly warrants an adjustment to your portfolio. Oftentimes, a moderate change will suffice. A diversified portfolio will give you the best chance at increasing purchasing power over the long run.

If you don’t think your portfolio needs any modifications but you still want to hedge against inflation risk, you can make spending adjustments. Reducing spending during periods of high inflation can help make your investments last, but won’t feel like a permanent change; you can always increase, decrease, or maintain your spending level, depending on your situation and the market environment.

When should I NOT make a portfolio adjustment during high inflation?

Don’t make adjustments to your portfolio in haste. It’s crucial that you take time to think about what makes the most sense for you and your long-term needs. Even if your risk tolerance has changed, your asset allocation shouldn’t change that much. We also discourage spontaneous changes based on hearsay; just because someone on the news or online makes a recommendation doesn’t mean it’s right for your portfolio.

Instead of veering to avoid bumps in the road, we recommend you stay the course and focus on your long-term goals—your future will thank you for it. If you’re ready to start the conversation, let us work with you to help you with your portfolio.  

Text Source – Vanguard

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