Many client meetings these days include a conversation about inflation. People are worried because two recent stimulus bills have pumped trillions of dollars into the U.S. economy. Not to mention, the White House and Congress are considering infrastructure spending which will put even more money into the pockets of workers.
In addition, the most recent annual inflation rate was 4.2% in April. Historically, the annual inflation rate is 3.23% and since 2010 inflation has run at a 1.8% annual rate. I understand why people are talking about inflation.
What should you do if you think inflation is on the horizon?
- If you’re working, keep saving.
- Take advantage of low interest rates to make large purchases you were going to make anyway, for example, a house.
- In your investment portfolio, keep the “duration” of your bonds or bond funds low. Duration is a measure of interest rate risk. Bond duration runs from “0” for cash to 30 for long-term government bonds. We suggest duration should be below 5 and even lower if you can.
- Do not hold too much cash. Inflation erodes the purchasing power of cash the most. Sitting on cash means you’re losing value. Of course, keep cash for shorter term goals and for emergencies, but invest the rest.
- Try not to over-react. The press is whipping up inflation fears, and you need to ignore the latest and most sensational news stories about inflation.
What about buying gold as an inflation hedge? Gold has a reputation as the best hedge against inflation, but it’s not true. Treasury Inflation Protected securities (TIPs for short) and even stocks are better.