Inflation is right here for now. How prime monetary advisors are dealing with it

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Shoppers in a New York supermarket on August 11, 2021.

Wang Ying | Xinhua News Agency | Getty Images

An emerging question for the US economy is how long will inflation continue.

Based on the latest government data, there are good reasons to inquire.

The consumer price index, which measures the average change over time in prices paid by urban consumers, rose 5.4% year over year in September, the fastest increase in decades.

Meanwhile, the Fed’s preferred measure of inflation, the core consumer spending index, climbed to a 30-year high in August when it rose 3.6% year over year.

Fed officials take note of this based on recently released minutes of a September meeting in which some said it could take longer than they anticipated.

You’re not the only one worried. According to a recent survey by the Global Atlantic Financial Group, more than 7 in 10 retired investors – 71% – said rising inflation will negatively affect their retirement savings.

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“The big argument right now is how much inflation we’re going to get and how permanent it’s going to be,” said James Angel, associate professor of finance at Georgetown University’s McDonough School of Business.

As in the 1970s, signs of rising cost inflation are emerging, characterized by rising production costs, Angel said.

In addition, there were both monetary and fiscal incentives for the economy. That alone is going to be inflationary, said Angel.

“We need to buckle our seat belts,” Angel said. “Inflation is there. It’s real.”

Financial advisors who landed on this year’s CNBC Financial Advisor 100 list say inflation is a top theme in their work with clients. For many of these customers, it’s as emotional as it is financial.

“Many of our clients came of age in the ’70s when we last saw major inflation, said Andy Pratt, partner and director of investment strategy at The Burney Company, which ranks 38th on the 2021 FA 100 list.

Headquartered in Reston, Virginia, the company typically focuses on clients with investable assets of $ 1 million to $ 2 million.

Your customers remember skyrocketing prices, long gas lines and how they couldn’t afford things, Pratt said. The benefits of high inflation, like higher wages, aren’t that important, Pratt said.

To counter their emotions, the company has reminded customers that this is not necessarily a repeat of the inflation they remember and that it can happen for a variety of reasons.

It has also devised strategic asset allocations to endure inflation, Pratt said.

While this includes some exposure to bonds, the company is cautious about over-allocating this asset class. At the same time, they tend towards value stocks versus growth stocks.

Meritage Portfolio Management, a boutique portfolio management company ranked 60th on this year’s FA 100 list, also has customers, especially baby boomers, regularly ask about the inflation spurt.

“The big argument right now is how much inflation we’re going to get and how permanent it will be.”

James Angel

Associate Professor of Finance, McDonough School of Business, Georgetown University

Mark Eveans, president and chief investment officer for Overland Park, Kansas, said stagflation, which is characterized by high inflation and high unemployment, is a major concern of his.

In particular, the spike in cost inflation mentioned by Angel could be a trigger for stagflation. Other experts have also warned that stagflation is an important risk to watch out for.

The big risk for investors in such an environment is that it would be very difficult to achieve real growth rather than nominal growth, Eveans said. The 60s to early 80s are a perfect example of this, he said.

“It wasn’t a good time for investors because they lost real money during that time,” said Eveans.

To counter this risk, Meritage takes the position that inflation is less fleeting than some experts forecast.

It also adapts the strategies for its portfolios, which it typically builds stock by stock and bond by bond. The company has increased its exposure to value stocks versus growth stocks over the past nine months in what Eveans describes as a “change in margin” rather than a fundamental change.

Gasoline prices at a San Francisco gas station were over $ 4.00 per gallon on October 12, 2021.

Justin Sullivan | Getty Images

In addition, the company has also increased its allocations in areas such as energy, materials and finance, and reduced customer exposure in other sectors such as consumer staples.

On the pension side, Meritage is focused on security for income and capital, said John Wallis, director of fixed income.

This includes a tiered approach to portfolio maturities and a preference for corporate bonds over Treasuries, he said. The company also adds inflation-linked securities where possible.

Much of how the inflation story plays out will depend on the Federal Reserve, Wallis said.

Should the Fed fall behind, inflation could seize up in the financial system, forcing the central bank to take more aggressive action later, he said.

“That would probably worry me the most and would probably surprise investors,” said Wallis.

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