facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
%POST_TITLE% Thumbnail

Inflation: How much do you keep?

Inflation is a sleuth villain. It steals silently. It persists.

Let’s Define Inflation

In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.[2][3] The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index.

Inflation Definition Source

Inflation Definition Source

When I began my career in 1969 in the financial services business, it was a time when inflation was entering the last phase of a cycle that began in 1941. It started during World War II.

Here are the historical inflation rates from 1914-2022 represented in a chart.

People may say inflation has become more of an issue when the United States abandoned the gold standard. Perhaps? I suspect it is partially responsible but when governments and central banks throughout the world borrow and print too much money there is a consequence. Ending the gold standard was not really the problem. It was the lack of discipline by government and the Federal Reserve.

What does it mean for us?

Well, 50 years ago, when I was in training to become a financial advisor, a friend told me the only thing that matters when it comes to making money was: How much do you keep?

Back then I limited its meaning to after tax returns. But inflation should have been considered too.

Take home pay is about what we keep when it comes to earned income. Interest income might seem that way but when the inflation rate is 8%, a 1% return is hardly enough to matter.

Fixed Income

The biggest impact inflation has is on fixed income securities. First interest rates do not cover the inflation rate. Today’s interest rates are much less than inflation at 8%. Not as obvious, but even more destructive, is the dollars paid back on maturity will have less purchasing power.

People who buy CD’s and bonds usually say they sleep better at night knowing they will get their investment back on maturity. Investors focusing too much on safety and income might not sleep as well if they gave more thought to the purchasing power of a dollar when received in the future.

“Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.” Warren Buffett wrote this in his 2020 letter to Berkshire Hathaway shareholders.

Securing financial security requires a diversified portfolio of securities. Focusing on income producing securities, especially fixed rate securities, overexposes an investor to negative influences of inflation.

It's all about Balance

Our diets and our investment portfolios have much in common. We all know that a healthy life requires a balanced diet to include foods we may not really like. We understand the consequences when we eat too much of what we like instead of what we need.

Investing is the same. An unbalanced investment approach has negative consequences even if we sleep better.

What's the Curran Approach?

Curran continues to take a defensive and short-term approach to fixed income investments. We acknowledge that real returns are badly lagging inflation and see no short-term solution. Interest rates will rise but not enough to offset inflation. We maintain fixed income allocations for diversification as well as relative stability. But we believe positive returns adjusted for inflation are not likely in the near term.