Seriously, take a deep breath and relax, inflation is not as scary as it sounds….IF you have a plan.  Every media outlet and newsfeed I see today seems to be sounding the alarm on rising costs.  That’s what inflation is, the same stuff we purchased yesterday that now costs more today.  Is that so scary??

It can be if your portfolio holds a significant percentage of fixed income.  Fixed income investments may be bonds, think lending to companies as opposed to owning them.  Investing in fixed income may initially seem “safer” as their price is less volatile (up down) then investing in various companies whose price and value move around a lot.

Our education from an early age has taught us to believe volatility is something that’s bad and should be avoided.  This wrong message continues with an emphasis on safety of principal versus thinking about hedging rising costs with our spending over time.

What’s truly risky today is going into retirement as a 65-year-old couple with a bulk of fixed income investments thinking this will last to age 100.  Spoiler alert, it won’t, and sooner or later this couple will be forced to sell some of their investments to meet their spending needs.  Then their investment reservoir begins to drain, and this becomes beyond stressful.  A very expensive lesson to learn once you’ve left the work force and have repurposed your time spending it where you like.  Hard to recover from unless your adult children are wealthy and can bail you out.  No 70- or 80-year-old parent wants to ask their adult children for help, some have no choice.

All of this may be avoidable if you check and update your financial plan each year.  A theme that should be included in your plan is your ability to meet short term liquidity needs (think cash) AND hedge rising costs in the decades to come.  How can this be accomplished?

Holding boring cash in your bank accounts for short term essential and discretionary spending.  Don’t be cute and try to squeeze return from your cash by tying it up in some investment product.  Keep it simple, keep it in cash, and call upon it whenever you need to spend.  Done! Most investors don’t have a financial plan and therefore believe they must eke out a return, yield, or something from everything they own.  A financial plan supplies perspective giving each of your accounts a job description and clarifies the role and timing of first use.  How much cash should you hold?  A comfortable amount you and your planner may decide is best to meet your spending and reserve needs.

Invest the rest in diverse companies that may generate income over the long run.  How do companies generate income?  It arrives via increases in their price AND dividends when paid.  When you need income, sell some of your investments. Done, it’s that simple.  This replenishes your above cash reserves and lets you spend with less worry as costs increase in the long run.  Your remaining investments will continue to contract and expand in price so more choices may be available tomorrow.  This is the key to all the hype around inflation.  Owning companies (not lending to them) so that you may decide on where and what you spend your monies on.  But there is a catch….

You must have a good temperament and be able to sit still in years like 2020.  When the world seems to be ending and toilet paper is now more valuable than a seven-figure portfolio, you must not react.  You must sit still and hang in there.  It helps tremendously to have someone to talk with that you may share your uncomfortableness with.  Those investors who survived 2020 likely did so in partnership with someone they trust who kept them from hitting the panic button and moving everything to cash.

Equities will continue their volatility in price as that’s how companies work. Expanding and contracting overtime, often without reason or explanation.  A portfolio that includes equities will be a bumper ride (up down) but will address the hype around inflation.  Equities are what tames the inflation lion that seems to be roaring a lot today.

Want to read more on this topic?  Check out what I’ve written here:

Rising cost of Life

Perspective

Three numbers that Matter

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