Inflation has been on the minds of many for quite some time now, and it's not hard to understand why. Whether it's a grocery bill, interest rates or otherwise, most people are feeling the effects of inflation in some shape or form. The good news? There are some steps you can take to soften the blow.
To learn more about inflation-proofing your investments, we connected with Kimberly Lynn Martin, CPFA, C(k)P, CFP, CIMA, MIC, Senior Resident Director and Senior Vice President with Hammond, Martin & Associates in Muskegon.
Martin—who began her career as a Merrill Institutional Consultant in 1989 and has received a number of accolades for her industry excellence—says the primary way an investor can protect their finances from inflation is through diversification across asset classes, which can reduce the impact of market fluctuations on one's overall net worth.
"This is important to think about in the current climate because CPI (All Urban NSA) was up 17.76% on a cumulative basis from January 1, 2021 to December 31, 2023," Martin explained. "Over the same period, the S&P 500 Price Return index was up 26.99%, which equates to a real return of 9.23% when factoring in inflation. This highlights the significant negative impact inflation can have on your portfolio returns."
Martin shares that in the current environment, she's speaking more with clients about "real return" or "inflation hedged" investments to keep up with or outperform inflation.
"Some examples that may work for some portfolios include Treasury Inflation Protected Securities (TIPS), Precious Metals (i.e. Gold), Commodities, Dividend-Paying Stocks, and Real Estate," Martin said.
She added that investors may consider prioritizing their emergency fund to ensure savings keep up with rising costs and placing those savings in a high yield savings account or CDs to provide further protection against rising prices.
"Regardless of the strategies used, an investor should always remember to employ diversification, as that's a key component to reduce portfolio volatility, which can have a material impact on financial plans," she explained.
But what about inflation's impact on existing debt?
"When inflation is at an elevated level, the Federal Reserve increases interest rates, which raises the cost of debt," Martin said, adding this can also reduce an investor's ability to repay their debt in a timely manner because a higher portion of their periodic payments are now going toward interest instead of principal. "To combat this issue, some investors are placing their savings in a high yield savings account, CDs or some other stable yielding investment to offset some of the increased interest cost, allowing them to continue to pay off debt in a timely manner.
"They may also consider eliminating unnecessary expenses (i.e., subscription services, etc.) to bolster their household budget so they can increase debt repayments to offset some of the cost associated with higher rates."
Martin also noted that inflation assumptions—projected outcomes for the future—can be incorporated into long-term financial plans by using an average figure (i.e. 2.44%) to determine the long-term effect (or drag) it has on their outcomes.
"This allows for an investor to consider the long-term impact of inflation on their goals ahead of time so they can budget accordingly and create a portfolio that will provide the appropriate level of diversification to insulate against periods when inflation is elevated," Martin said.
Overall, there are a number of things you can do to protect yourself and your finances from the effects of inflation.
"A specific resource we recommend for tracking and managing the impact of inflation on one's finances is having a comprehensive personal financial plan—a plan that incorporates your net worth statement, asset allocation, income, expenses and goals into a comprehensive report," she said. "This data will provide a path to the funding status of your goals. As things change, such as higher inflation, your plan should model scenarios that explore shifts in your portfolio to potentially increase the probability of successfully achieving your goals."
Written by Sarah Suydam, Managing Editor for West Michigan Woman.
This article originally appeared in the Aug/Sep '24 issue of West Michigan Woman.
