Join Bridget and John in this insightful episode of Friends Talk Financial Planning, where they delve into the ongoing implications of inflation on investment portfolios. Whether you're feeling the pinch or just planning for the future, understand how today's economic climate could affect your financial decisions. Don't forget to subscribe for more valuable insights!
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TRANSCRIPT:
Bridget: The lingering effects of inflation just don't seem to go away. And people are concerned. I've heard it from clients. They're concerned about the long-term impact on their portfolio. So that's what we're going to talk about today on Friends Talk Financial Planning. I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Before we dig into the impact of inflation on our portfolios, I just want to remind all the viewers, hit that subscribe button. Help other people find this information on YouTube. And with that, I'm excited to jump into this topic, Bridget. I've been hearing some similar things from clients.
Not really worry necessarily, but questions about why inflation hasn't gone away. We're expecting rates to go down, but they really haven't. And how is this going to impact our portfolio? What do we do about it? And I know some of the things that I say, but I'm really interested to hear what you have to say and how you communicate this. So when it comes up for you, what are you thinking about? What are you talking about?
Bridget: Well, first of all, I think that people are mistaking the hangover for the drinking. I feel like we're having a hangover, and we feel like we're still drinking because people are seeing all those prices that are really not going to ever go down again unless we have deflation, which we don't want. If you know much about deflation, you don't want that. So it's just taking people a while to adjust to the new levels. And still inflation is higher than what the Fed wants, and obviously it's higher in certain segments of the economy.
I think that it's just taking people a while to adjust to the new reality. And then I also think that different age groups see it differently. I am 60, and when I was a kid, we had inflation. I know what it was like. And so, it's not the end of the world to me in same the way it is a new experience to a lot of people who are younger than me. So that's part of it, too. There’re a few things going on there. So we talk about that, then we get into the actual facts.
Okay, so we want to process the feelings and what might be going on at the emotional level and recognize our inner reptile and say, “How are you doing?” But then let's get back into our logical brain a little bit with investing because that certainly helps. So then it's helpful to take a look at that facts. We've got an article from Dimensional that shows what inflation really is. And those are the red dots on this, the little red sticks with the dot. It shows what inflation is every year. And then it has market returns. And so, this is telling a different story. What are your thoughts, John?
John: Yeah, interesting. I was hoping you're going to tell me what story you see in this. First, I love the idea of looking at the facts. Inflation can be the boogeyman for folks. And you go, oh, inflation kicks in, and we're supposed to be afraid of it. This is sort of the feeling when we haven't had inflation in meaningful format for 20 years. And now suddenly it kicks back in the last few years. It's sort of this disorienting feeling to compare this to when we were growing up and had these sorts of things. And so, I love just seeing the data on here. And I so appreciate you bringing this up because I'd kind of forgotten about this slide.
Take a look at where those inflation dots are. You can see that some of them look like they approached 5% in previous years. But of course, the last couple of years have been pretty high in inflation. And I like to talk about patterns and more specifically, the lack of patterns. We want there to be an explanation for all the things that go on. That's human nature, maybe that reptilian brain you're talking about. And the reality is a lot of these things just don't connect. So as I look at this, what I see in there is, geez, when there's periods of really low inflation, some years in the stock market are really good. And when there's periods of low inflation, some years in the stock market are really bad.
And I look at those two really high years of inflation here, and go, “Boy, sometimes when there's really high inflation, the stock market's really good, and then 50% of the time it's bad.” And there are two yearlong samples. And I jokingly say that, but the idea is, listen, is there a connection? Not necessarily, and certainly not based on this information here. There’re other things that go into all the things that we discuss both on our show and with clients. There's no one thing. Inflation and this and boom. It's not how it works, but is it a factor? Yes. Is it the factor and the thing that we need to be sort of scared of or take some action on? And, man, I just don't see it in the data and in the graphic that we're looking at.
Bridget: Yeah. And I think if we look at the column to the right, the third point is very important. “Over the period charted, the S&P 500 posted an annualized return of 7.5% after adjusting for inflation.” Okay. And again, and actually this whole chart is real return, which means after inflation. Inflation might make the return sound better. In 2021 inflation might have made the returns look better, but generally we're talking about 7.5%, which again, let's pull back to curtain and talk about the facts.
John: Yeah. And at 7% net real return, so after inflation, that means your money in today's dollars, doubles every ten years. And you think about that from a big picture planning standpoint, you go, “Well, that leads to a lot of success in our financial plans.” Another thing this reminds me of, and one of the things that we talk about with clients all the time is the biggest way to offset inflation or to be prepared for it. And I want to be clear that when we're talking about these things, it's not, “Oh, here's what we think is going to happen. We're going to see inflation, so let's shift to this or let's shift to that.” That's not how it works.
But owning stocks, and when I say owning stocks I mean in mutual funds or ETFs in a diversified portfolio. But companies can adjust to inflation a lot more efficiently than most of our other investment things can. And we've seen it the last couple of years, unfortunately, at the grocery stores and different places where when you buy things, it costs more. But when inflation comes in, it's not like McDonald's says, “Well, geez, the cost of our supplies is a lot bigger. I guess we're going to make less profit.” What happens? Prices go up.
Companies can be much more responsive to inflation to keep their profits up, so they’ve got a lot of ability to adjust. Of course, they’ve got to balance that with raising prices too high, so that nobody buys the Big Mac or widgets, but they can adjust when the price of their supplies goes up 50%, They don’t just simply eat all that strategically over time and go, “Okay, prices have to go up, so we can be profitable at a business.” You can't necessarily do that in other places, or it's not as evident from an investment standpoint. So having money invested on that stock side of our portfolio actually protects us against inflation in the long run.
Bridget: Yeah. And the other thing is that if you look at the different market segments and slice and dice a little bit, we've got another slide here. We put it in at the end because we feel like it's a little less important than the first message that we're giving, but different parts of the stock market do a little bit differently in inflation. And I would not say, okay, if you think there's going to be more inflation change now, because you're late to the game. But this is a case for diversification, so a wide range of stocks, sectors, etc. matter.
Recently value stocks have not had that great of a run, but generally, value stocks do better during inflation, and we always incorporate those in our portfolio. We actually tilted a little bit toward value for a variety of reasons, and actually inflation is not one of the biggest. I would not say our value tilt is because of inflation, but that might help us. We don't know how it's going to work. So I think that's a great place to wrap it up, John. I'm Bridget Sullivan Mermel. I've got a fee-only in the financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only in the financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking on new clients, but we're also both members of the Alliance of Comprehensive Planners. So if you like what you hear on our show and are interested in finding a planner that thinks similarly in your area, you can check out acplanners.org.
Bridget: And help us get to 1,000 subscribers. Please subscribe.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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