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Inflation Doesn’t Have To Be a Negative for High-Net-Worth Investors

Inflation Doesn’t Have To Be a Negative for High-Net-Worth Investors

27 Oct 2022

It is no secret that inflation can be a thorn in the side of investors. Gloomy economic headlines can make it difficult to feel optimistic about the day, much less see a silver lining in the financial future. However, there are potential upsides for high-net-worth individuals. 

In fact, any decent financial advisor in Akron or Canton OH knows that when inflation is approached correctly, it can offer potentially profitable opportunities. 

Please explore with us:

  • Inflation can be a good thing for investors 
  • Hedge against it with assets that maintain value
  • Diversify your portfolio among asset types
  • Short-term losses can be made up in time

Inflation Can Be a Good Thing for Investors

Market volatility can be a challenge to appreciate. Most investors (as well as financial industry professionals) tend to prefer things calmer. Nevertheless, as frustrating as some aspects of inflation can be, it does not have to endanger your financial goals. 

As a matter of fact, with the right proactive strategies, it is possible to see returns—even while the market is in turmoil. Before we discuss that, however, please allow us to ask a question: Is all inflation within an economy bad? 

The answer, believe it or not, is “No:” During times of low inflation, the U.S. government actually takes measures to see that it does not go below 2%. This is because, in the total absence of inflation, we get another, even more harmful economic state known as “deflation.” 

Deflation is more than the opposite of inflation. In some ways, it can be far more dangerous, economically, because it can descend into a deflationary spiral. At that point, a worst-case financial scenario becomes a vicious, seemingly never-ending cycle. Imagine the movie “Groundhog Day,” but set in the days of the Great Depression and you will get the idea. 

Hedge Against It with Assets That Maintain Value

I mentioned deflation above because it is worth remembering that things could be worse. Nevertheless, raging inflation is no one’s ideal, either. It normally never lasts forever, but waiting it out, patiently, can be easier said than done. Especially if your assets are not balanced for the market weather, it can get extremely difficult. 

Generally, speaking, you need assets that thrive when interest rates rise. This is because the Federal Reserve fights excessive inflation by instituting rate raises (sometimes called “hikes”). Floating-rate investments increase in value when this happens—because their holders see higher returns as a result (which increases market demand for them).

Conversely, fixed-rate assets go the other direction, losing value: The very inflexible stability that makes them desirable for retirees in times of lower inflation keeps them from generating higher returns. As a result, the market tends to ignore them, clamoring for floating-rate investments while those assets’ revenue generation is high.

It is not too late, even now, to rebalance your portfolio for this inflationary period. The sooner you sit down with an investment manager to review it, the better. Losses may not be recouped overnight, but they can be made up over time. 

Diversify Your Portfolio Among Asset Types

Mitigating losses (and potentially, increasing returns) may also be possible by diversifying your investments. If the first step of weatherproofing for market volatility is focusing on high-interest-rate-friendly assets, the second is utilizing a more varied approach: Rather than choosing stocks and bonds from various companies, you spread your investing further into a differing array of asset types.

For example, in addition to stock shares of companies and floating-rate bonds, you might also purchase commercial real estate through a REIT, precious metals such as aluminum, and commodities (for example, natural gas and corn). The idea behind this strategy is to limit your overall exposure to any one asset that loses value. 

In other words, by diversifying your portfolio across different kinds of investments, you create the financial equivalent of bulkheads along the length of a ship’s hull: If one section floods, it is easily sealed off to prevent the danger of sinking. 

 

Fortify Your Finances Against Market Volatility With Comprehensive Professional Financial Planning

 

Stay Disciplined To Avoid Panicking

The unofficial third step for dealing with stock market volatility is drawing a deep breath—and taking a mental step back from market conditions. Money is normally emotional for every human being who has any. However, logic, reason, and knee-jerk panic never inhabit the same space. 

Investing is a long-term activity, like sailing a ship between continents. There are adjustments to be made from time to time during inflationary storms, but much of the journey requires simply waiting. Those who stay the course tend to exit squalls unscathed—and then reach their planned destinations. 

On the other hand, those who fail to keep calm and sell off still-promising assets in a rush sometimes deeply regret it later. Stock market weather is somewhat cyclical, which means that better economic days could be here sooner than they expected them. When all the shares of Niftytech that they sold off eventually regain their lost value—and then keep climbing—it is too late to buy them back. 

Short-Term Losses Can Be Made Up in Time

umbrella sticking out of the top of a piggy bank with rain clouds showering down representing financial planning in ohioTry to keep in mind, as well, that short-term losses are just that: Short-term losses. For the reasons I’ve mentioned above (and more), successful investors tend to keep a long-term mindset. They avoid letting their emotional gut call the shots, favoring a calmer, more analytic approach. 

As a result, they know that dumping a decent asset during volatility is like throwing your suitcase over the side of the boat during a storm (because someone said it could make the ship more stable in the water). That might seem to make sense at the time, but you are bound to regret it when you make landfall again. 

One of the many advantages of working with a fiduciary investment advisor is that if necessary, they can help you get perspective when headlines spook you. We are not emotionally attached to your portfolio as you are, so we can provide objective insight, even when you feel anxious. 

McGervey Wealth Management has an experienced team ready to help you through all of the market’s seasons. Our full-cycle approach to asset allocation can help you keep your portfolio balanced to—not just survive storms, but—thrive in them. 

We specialize in concierge, high-net-worth financial planning in Akron and Canton, Ohio. Contact us today to learn more about our investment strategy, retirement planning, estate planning, and more.

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More About the Author: Matthew McGervey, CFP®, MBA

As a CERTIFIED FINANCIAL PLANNER™ professional, Matthew has a broad knowledge of personal financial planning strategies and solutions.