Best hedge against inflation is keeping emotions at bay, trusting your plan

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You have to go back to the mid-1970s to early 1980s to find inflation rates near where they have been lately, which makes it likely that this is the first time you’ve stood nose to nose with this economic bogeyman.

Controlling your emotions and sticking to your investment plan may be the best ways to hedge against inflation’s effects on your finances and your psyche.

Laurie Haelen, senior vice president and manager of investment and financial planning solutions for Canandaigua National Bank, cited research that found people felt more distressed when their portfolio was down than elated when it was up.

“Losing money feels so bad for people,” she said. “Even if it’s just on paper. It’s just the nature. I feel that way. It doesn’t feel good. That’s why so much of our job is keeping people in their seats for the long term.”

Fear can move markets, and it also can move investors to make rash decisions.

“I point to February and March of 2020 (as examples of) if ever there was a time you might want do something different,” said Brian Murphy, chief investment strategist and a certified investment management analyst with CNB. “You drive down the road, there wasn’t a car to been seen. There wasn’t a business open. You might have thought that was the time to get out. If you had, within six weeks after that was the beginning of one of the most incredible rallies we’ve seen. You would have missed out on that.”

Investment advisors now educate clients about inflation in the context of overall economic indicators such as unemployment and earnings reports. Advisors are also cautioning clients to not overreact to yesterday’s news at the expense of potential future scenarios.

“Lots of times people think it’s worse than it is,” said Haelen, an accredited investment fiduciary.

While the leading indices may be down by double digits, that doesn’t mean an individual portfolio has taken such a big hit. There also are ways to absorb the blows – by postponing major purchases or finding other ways to reduce spending, at least for the short term – that help investors control what they can.

“It’s not just what investments are doing, it’s what you can do to feel more secure and empowered as an investor,” Haelen said.

But it can hard to take your eyes off the day-to-day wreckage of the Dow, S&P and NASDAQ.

For investors who feel compelled to do something, “there are pockets of opportunity that have a positive correlation to inflation,” said Richard Dougherty, managing partner of Echelon Wealth Advisors.

“The challenge that we have right now is traditionally the best hedge against inflation is stocks, but that’s hard sale to make in an environment we’re seeing right now with as much volatility as we have,” he said.

“At the same time, not all stocks are created equal,” he said. Understanding how different asset classes of stocks react to different economic environments is critical. “It’s about being in the right type of stock, assuming that the appetite for risk is there.”

An investor’s time horizon also plays into how they and their portfolios cope with inflation, and this may be a time to tweak rather than overhaul.

“If you think about a 30-year-old that has a long runway for employment, this volatility is absolutely their friend from a savings perspective,” Dougherty said. “Those individuals may not want to change their investment profile at all. Every pay period they’re making a contribution into their retirement plan and they’re buying more shares of their investment at a cheaper price. As the market recovers, that will allow their portfolio to recover at a faster pace than someone who is not making those contributions.”

Investors with a shorter timeframe may feel an urgency to adjust their portfolio and look at investment vehicles such as commodities or real estate. But those options may be more tactical than strategic, have their own volatility and may require a higher risk tolerance than some investors have.

“Our responsibility as advisors is to have a ‘soft landing’ when it comes to volatility within a client’s portfolio,” said Alecia Fisher Dougherty, partner with Echelon Wealth Advisors and a certified financial planner.

She said that traditionally, conservative investors could seek solace in bonds, but the current environment is challenging for them and for more aggressive investors. “There are not a lot of places you can put your money in and know it will have a consistent investment experience.”

Put another way: “There’s no free lunch in investing,” said Chris Petrosino, managing director of quantitative strategies group of Manning and Napier.

Considering only the effects of inflation on your portfolio may cause you to ignore other factors that affect investments.

“Avoid fighting the last battle,” Petrosino said. “Avoid being overly reactive to what has happened. The risk is you take your eye off the ball in terms of what’s coming down the pipe. The pain point that was may be very different than what the next issue is.”

Factors such as just-in-time or just-in-case manufacturing, globalization and geopolitics can put pressure on the economy. Just because something doesn’t have an effect today doesn’t mean it won’t be important in a few years.

Elizabeth Thorley, founder and CEO of Thorley Wealth Management, said the current situation is a reminder to assess overall risk management to gird your portfolio for whatever is next.

“The key is not try to be reactive,” she said. “Your frame of reference narrows. You don’t think about the bigger picture. Two or three years down the road, it will be something else.”

Which brings advisors back to reminding clients of their investment goals and why there was all that talk of diversification.

“A properly diversified portfolio will always have parts of the portfolio outperforming the other,” Thorley said. “That’s the idea. It’s not going to prevent risk. It’s not going to prevent decline. It’s designed to reduce the impact. An appropriately diversified portfolio should be able to weather those types of storms.”

It may seem boring and may not be what a lot of people want to hear when negative returns roll in.

“We’re defining why you diversify,” she said. “Risk happens, and this is our way of managing risk.”

Patti Singer is a freelance writer in Rochester covering various topics. Contact her at [email protected]