What inflation means for your investment portfolio

Whether it’s been at the grocery store or the gas pump, many of us have undoubtably begun to notice higher prices of goods and services in our daily lives.

The Bureau of Labor Statistics reported that for the month of October, the Consumer Price Index — which measures the average change of prices for consumers for a market basket of goods and services — rose by 6.2% over the last 12 months.1 This is the highest reading we have seen in three decades and marks the fifth month in a row that the U.S. year-over-year inflation rate has been greater than 5%.2

Are we experiencing “transitory” inflation?

Initially, reports of higher inflation were not surprising to many. Still coming out of a once-in-a-lifetime pandemic and low baseline price numbers from 2020 (when virtually everything was shut down), higher prices seemed like a short-term thorn in our side — yet another side effect we could chalk up to COVID-19.

However, as higher prices have persisted over the last several months, it’s become clearer that the inflation we are seeing is multi-faceted — involving increased consumer demand coming out of the pandemic, coupled with seismic supply chain issues3 — and what was initially thought to be “transitory” inflation could run well into next year.

A long-term view of inflation

Keep in mind that economic forecasts are just that, forecasts. In the short-term, economic and market data is extremely hard to predict.

It’s important to keep a long-term mindset, especially when you think about what the effects might be on your investment portfolio.

Here’s a look at the U.S. inflation rate over the last century or so:

Consumer price index for all urban consumers

Source: Charles Schwab, MacroBond, using monthly data available as of 9/30/2021. U.S. CPI Urban Consumers YoY NSA (CPI YoY Index).

Noticeably, inflation has been rather volatile over time.

However, we can clearly observe that inflation has remained relatively stable over the last 40 years, breaking 5% on a few instances only to quickly fall back down to the lower inflation numbers we have become accustomed to seeing.

Why is this? Well, life today looks much different than it did 40 years ago. For example, advances in technology and productivity gains are factors that have been attributed to keeping inflation low, as they’ve allowed business to scale and become more efficient, thereby limiting price increases.

We’ve also become much more sophisticated in our use of both fiscal and monetary policy to control inflation and keep our economy running smoothly. In fact, did you know that the Federal Reserve aims to keep average inflation at 2% over the longer run?4 Low and stable inflation is desired because it allows households and businesses to make sound decisions about their finances, and is certainly preferred to its counterpart, deflation, which can lead to falling revenues for companies and increased unemployment (among other things).

While we don’t know for certain how inflation will play out in the coming months, some level of inflation is to be expected (and desired), and we haven’t seen persistent higher inflation since the 70s. Even Treasury Secretary, Janet Yellen, recently stressed that the Federal Reserve wouldn’t permit a 1970s-like scenario to repeat.

Ultimately, the risk of seeing “runaway” inflation like we saw 70s is conceivably much lower today.

So, what does inflation mean for your investment portfolio?

All this news of higher inflation has left many wondering what this might mean for their investment portfolios. After all, if your investments aren’t keeping pace with inflation, you are losing real buying power today.

For context, let’s look at how investments have performed in the past through different types of inflationary environments:

How investments performed through different types of inflationary environmentsSource: J.P. Morgan Asset Management.5

You’ll notice that regardless of the type of inflationary environment, investment returns have been robust across various assets classes.

Rather than making any short-term, speculative adjustments to your portfolio — which can be difficult and risky — we recommend taking a more strategic, long-term approach to combat against the risk of inflation.

Here are our three key takeaways for you:

1. Stay diversified: While these numbers might provide some insight into what has worked well in the past, this is not indicative of what we might see this time around. Make sure you are well-diversified across various assets classes so that regardless what performs well and what doesn’t, you are positioned to capture the positive returns and reduce volatility in your portfolio.

2. Stay disciplined: Long-term, stocks have proved to be a strong hedge against inflation. Going back to 1926, the annualized inflation-adjusted return for stocks has been 7.3%.[6] Often times, companies whose stock you are investing in have the power to pass along higher prices to consumers. We have observed this already this year, as we have not seen a decline in profit margins for S&P 500 companies despite higher inflation, and the stock market has provided strong returns.

However, this does not mean that you should allocate your entire portfolio to stocks. Bonds still play an important role in an investor’s portfolio. It’s important to maintain an asset allocation of stocks to bonds that you’re comfortable with and fits your unique situation to ensure you can stay invested through volatile times and, ultimately, achieve your long-term goals that define why you set out to invest in the first place.

3. Embrace the uncertainty: There has been a lot of noise around inflation lately, and it’s surely going to be a hot topic this holiday season. Focus on tuning out the noise and embrace the uncertainty. Trust that you have a solid investment portfolio and financial plan in place.

If you’re concerned about inflation’s impact to your portfolio or how to stick to the above three practices, contact your advisor. We can help you stay diversified, allocate your portfolio to your comfort and risk level, and give you tips on embracing the uncertainty that comes with investing.

If you don’t have a financial plan or aren’t sure about your investment strategy, contact a Wipfli Financial advisor. We can help you create a diversified portfolio allocated to your comfort and risk level.


What inflation means for your investment portfolio

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Cole Gustke

Financial Advisor

Cole Gustke is an Financial Advisor with Wipfli Financial Advisors, based in Wausau, WI. He works collaboratively with a team of financial advisors to provide comprehensive financial planning and investment advisory solutions to individuals, families, small businesses and retirement plans.

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What inflation means for your investment portfolio

time to read: 5 min