Inflation: Should I be worried?
Do you ever get the feeling the financial press were slightly disappointed the temporary decline in the global stock markets in 2020 has been erased and surpassed? A growing stock market isn’t really newsworthy after all.
Instead, in the last few months we’ve seen a new set of warning signals being flagged in the press citing the prospect of rising inflation as the next doomsday scenario on the horizon.
For the economy, inflation is like salt to your dinner. A little can enhance the flavour, accidently pour too much and the dinners in the bin. So, we need some inflation to keep things ticking along.
However, inflation is a silent killer of savings for the average Australian.
The trap of cash and bond heavy portfolios
Take the classic example of a postage stamp:
So if a client walks in my door needing a $50k a year income from their investments of $1m for the next 20 years, why not just leave it as cash, drop it into a bank account, set up a regular withdrawal and send them on their way. $1,000,000 divided by 20 is $50,000 a year?
Unfortunately, that’s not how it works. Because if inflation averaged 3% (the long-term average), they would need nearly $1,383,824 over those 20 years and an annual income of over $90k in year 20.
Inflation, even in it’s mildest form kills the investment plans of those who save in cash and those who are incorrectly guided to ‘Cautious’ Portfolios in retirement, which are highly invested in bonds.
At Metric Wealth, we don’t use terms like ‘Cautious’ and ‘Balanced’ when describing our portfolios.
Cash and bonds are some of the most dangerous assets to predominantly hold when it comes to maintaining our long-term spending power.
Inflation hasn’t really been on our radar for a while (except those looking to enter the housing market) but it’s almost always there.
Why might it be increasing soon? We have many economies around the world that have been propped up with free cash from Governments, consumer spending levels on luxuries (holidays, eating out etc) is down over the last year, whilst savings rates have increased.
As the world opens up, this can see a rapid rise in spending. Higher demand can increase prices when you’ve more buyers for limited resources (as supply chains start to catch up.)
Prices rise, employees push for higher wages and the circle continues.
How long an inflation trend lasts for, when it starts and when it stops, and where prices normalise after is completely unknown.
Are changes to portfolios needed?
An inexperienced investor (or a poorly advised one) will be reading the headlines and making changes to their portfolio now – switching into gold and commodities, which tend to briefly do better in high inflation periods – and expensive fund managers are already starting to make their media appearances talking about how they will ‘rotate their portfolios’ to justify their fees.
Let’s be very clear – jumping in and out of gold or any other inflation hedge is more likely to make you poorer than richer. It’s complete luck in market timing if you buy into or out of these assets at the right time.
Returning to the stamp table and we’ll add in the Governments measure of inflation – a basket of goods and services - and also the Australian All Ordinaries Stock Market (the broadest and longest running Australian Stock market.)
Add in a steady stream of dividend income on top and the stock market knocks inflation even further out of the park.
A portfolio held mostly in the great companies of the world via the stockmarket, combined with your own calm behaviour will beat inflation in the long term every single time.
Sitting in a default balanced or lifestyle Super fund (or worse, in cash) for most of your life means the silent dragon of inflation can smash your chances of a dignified retirement.
If you’ve never reviewed your Super, feel free to send an email to hello@metricwealth.com and we’ll be in touch,
