“We’re concerned about inflation. What should we do?”
We’ve been getting that question a lot lately, and my response is always to continue investing over the long term. Even though stocks may experience volatility, they are known to be a long-term protection against inflation.
That’s because companies can keep up with inflation over longer periods of time. Let’s take, for example, a can of Coca-Cola. Let’s say it costs a dollar today, and the company makes 10%, or 10 cents, per can. If inflation pushes the price of Coke up to $2, it would still be making 10% of each can; instead of making 10 cents on the can of Coke, they’ll make 20 cents. This will increase Coca-Cola’s revenue and therefore should increase its share price.
Another positive way to deal with inflation is to maintain a globally diversified portfolio which includes value stocks – which we do. Diversification is “your friend”. Additionally, we’ve introduced TIPS (Tax Inflation Protected Securities) into our portfolios to further diversify portfolios.
We have found that clients can sleep well at night, knowing that they have a well diversified portfolio that will mitigate inflation risks over the long term. Remember even though an “all cash” portfolio might feel safe, that has risks, too – reduced purchasing power.
It’s important to remember that during periods of economic uncertainty (which it always will be), there will inevitably be bad actors out there muddying the waters between ethical and unethical behavior. It’s the same story I’ve written about dozens of times: Someone, somewhere, will always try to cash in on other people’s insecurities — whether it’s a talking heads on cable news or somebody trying to get you to do the “wrong” thing financially, so that they will benefit.
You have to have a plan and stick with the plan. And remember: stock owners have received higher returns because they get “paid” for living with price fluctuations and uncertainty.
Jeff Holland | VIAIV