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Inflation wants to break into your retirement portfolio and devour your returns. Especially when you follow the investing “rules of thumb.” 

Are you going to let it? Or are you going to entrench your portfolio with inflation-protecting defenses? 

In this episode, you’ll discover how to protect your investments from inflation. And how you can even profit during high inflationary periods. 

Listen to the episode now before inflation eats all your returns. 

Show Highlights Include:

  • Why being a “helicopter parent” towards your money ruins your returns (2:29) 
  • The counterintuitive way being too conservative during inflationary periods wipes out your retirement savings (5:03) 
  • WHy inflation almost always beats conservative investment strategies (and what to do instead so your returns crush inflation) (6:16) 
  • The 3 “inflation-favorable” sectors which can outperform the S&P 500 by almost double (7:28) 
  • How the Federal Reserve can wreck your retirement in a second (and the best ways to protect your investments) (9:11) 
  • The lagging sector that’s reemerging to dominance and can insulate your investments from inflation (15:24) 
  • The sneaky way your emotions trick you into buying high and selling low (18:34) 

To schedule your complimentary retirement track review, head to https://onecapitalmanagement.com. You can also call us at 805-410-5454 or text the word ‘TRACK’ and we’ll reach out to you.

Read Full Transcript

Welcome to Make Your Money Matter, the show that aims to change the way we think about financial advice so you can make better financial decisions. Brad Barrett is a managing director and partner at One Capital Management, a wealth management firm serving nearly 1,500 clients nationwide, with over $2.5 billion in assets. They are a group of advisors dedicated to ensuring their clients achieve their investment and retirement goals. And now, here's your host, Brad Barrett.

Welcome to Make Your Money Matter, the show dedicated to helping you create a better relationship with your money. I'm your host, Brad Barrett. And it's my goal to help distill the best ideas when it comes to your finances so you can make more confident money moves. Here at One Capital Management, our mission is simple, to help our clients and you listeners take control of your finances and build the life you deserve. Friends, today the challenge is no longer the access to information, but rather it's finding the right information, and more importantly, how that information applies to you. And that's my commitment to you here today on the Make your Money Matter podcast, because after all your money matters. And before we get started on this week's episode, to find out more about me or my team here at One Capital Management, you can go to our website at onecapitalmanagement.com or give us a call (805) 409-8150. And if you are on the website at onecapitalmanagement.com, you can click on the media tab and there you can download and subscribe to the Make Your Money Matter podcast. You can also download the podcast on any other platform that you would otherwise download a podcast, whether that's the apple app on your phone, Google podcast or Spotify, and leave us a comment. Let us know how we're doing, it's always good to get feedback. And as I say each and every week, if you like the show, share with someone you like, and if you don't like the show, I guess, share with someone you don't like.

But today we're gonna be talking about some ways to insulate yourself from inflation. I have two kids ages six and four, and any parent out there listening or grandparent listening who's raised kids knows that when you have your kids running around these beloved creatures that are yours to care for, and basically your job as a parent is to make them survive this wonderful, crazy, dangerous world, a ours. And I can't tell you how many times my wife, Veronica and I think man, especially my daughter, who's four, the girl, I love her to death, but she will find every corner in the house. She'll find every crack to trip on. It's unbelievable, the way she finds, unique ways to hurt herself. The other day, we're sitting in the driveway and my kids like to scoot around after school. So, we're sitting there and she scoots around. She gets on this skateboard. So, she's got one foot on the scooter, one foot on the skateboard. You probably know where this is going. The scooter decides to slip out from her right foot and in doing so, her left foot pops the skateboard, so, she falls backwards. And not only does she fall on the concrete, the skateboard then falls on top of her head. I mean, if you saw this and witness this, what happened in three seconds for any dad looking at this as going like first off, are you okay, honey? And then second off, how did you do that? It's kind of astonishing to me sometimes.

And all I wanna do is wrap her up in bubble paper. And as I'm witnessing this, which by the way seems to be like a daily event with her, love her, but it's just a constant with her. It reminded me a lot of what we tend to feel emotionally towards our money. Just the same. We want to insulate and protect it, the best we can, especially from something like inflation, which we've been talking about for six, seven months now on the Make your Money Matter show. We've been talking about it consistently here at One Capital Management. Rising prices are all over the news these days, we know this and they honestly might be with us for a while. So, it could be time to take action to protect these investments and look at it like wrapping bubble paper around them. So, here's a couple ideas to consider and I'm gonna filter in some of these ways that we're doing this for our clients here at the firm as well, because I do think for anyone listening that it's really important to know how to, but then also know what to do.

So, we wanna know what some ways to insulate your portfolio and your investments are. And then I'm gonna talk about how to, but before I get into that, inflation, as I mentioned is pretty much everywhere. We're seeing it in the prices of oil lumber, steel, real estate, everything's pushing higher. So, some of that inflation could be with, as I mentioned for some time, and I wanna talk about a few. One of the particular concerns is the increase in rents as an example, which is up over 8% nationwide, which is nearly a record high of about 1575 per month, now this is according to realtor.com. There's also rising wages for those of you who listen to the podcast last week, when I talked about Johnny Paycheck and the rising of wages, that is a very clear indicator of the general rise in most everything around us. Now you might think wage increases good for individuals, which it is. It can also mean higher costs, which are pass on to the consumers. So, as we get into some of these topics around how to insulate, let me start off with number one. And this one is going to sound counterintuitive, but I'm putting it at number one because it's important.

The first one I wanna talk about is don't be too conservative. Look, inflationary environments often see overall asset prices rise, but they can be challenging for the value of things like a bonds or cash because as interest rates rise, the value of your bond could decrease, which potentially eliminates any benefit you're receiving from a consistent yield. So, what once you thought was a really good banger of a two to 3% in a rising interest rate, it could actually impact your value of your bond. Now you still get the diversification for having fixed income or bonds in a portfolio that is still there, but during an inflationary time period or an increasing interest rate period, which we're gonna be seeing, we've already seen the fed talk about raising rates for this year. If you increase yield, you decrease bond prices. So, in a period of slowly rising interest rates, a traditional bond allocation could mean some dead weight holding back the portfolio from true upside potential. Again, keeping as a diversifier is important, but the allocation is more important.

So, a portfolio that is too conservative with that said will have a tough time keeping up with inflation, do the math, right? If we see a five or 6% inflation and our fixed income, which we once thought was really great, earning two or three, you are net losing two or 3% as a hypothetical. Now, conventional financial planning suggests an increasing allocation to bonds as one ages or approaches retirement. Many of you listening, whatever age you're at, you probably heard this notion before you get more conservative as you get older. And as I shared many times with our clients, but also multiple times on the Make Your Money Matter show, that is a general rule of thumb that needs to be really discussed out with your advisor and your retirement plan. So, as an example, if you are 60 years old, maybe you need a 30 or 40% allocation to bonds. But with interest rates so low and inflation becoming more of a threat again, this is a good example of considering that “rule of thumb” and how it really plays out in the current environment in which you are retired.

All right, number two, I'm gonna focus on a little bit more of the granular details on number two, and that's gonna be focusing on we'll call 'em inflation, favorable sectors. So, something we do here at One Capital Management is we have a broad diversification across different asset classes, different sectors and different industries. But in these time periods, it's really important to look out ahead as best we can and consider increasing allocation percentages in areas of the market that will do well in inflationary environments. Credit Suisse did some research on markets where inflation was expected to increase. And then ultimately, which sections of those markets or sectors performed best in those times. They found that on an average day, if the S&P 500 was expected to increase by 45 basis points or 0.45%, the energy sector was expected to increase almost double at 0.86% or 86 basis points. Two other areas with the potential to outperform include financials and materials. So, increasing exposure or forget increasing having exposure there broadly diversified whether it's through ETFs or individual stocks in those sectors could help your portfolio keep pace during an inflationary environment.

Number three, watch the federal reserve. Now I'm not saying you have to watch them religiously here, but there's an old saying in our businesses, don't fight the fed cue, the cure music here, right? But what I'm talking about here is understand what our central banking system is looking at doing. This is where an advisor comes in, cause this is what we do. One of the biggest concerns I think for anybody about inflationary pressure is what the Fed reserve might do in response actions the fed could take included slowing its recent bond purchases, which is called tapering or raising interest rates or all things that we've been talking about and you've seen. Now, while the numbers of the fed have signaled little change last year to policy in the short term, we are seeing that tune change and rightfully so. And that could put the broader market at a risk or at a discussion to understand that there may might be volatility and variability around the consumer sense around increasing interest rates. Action by the fed to quell inflation could lead to a somewhat of a correct pullback, we've been seeing that in January and it could require that investors take some risk management measures.

And that's something that we talk about when it comes to actively managing and broadly diversifying yourself, but also taking a risk management approach, which allows for the allocation of your portfolio, whether it's an IRA, deferred comp plan, a 401k plan, whatever it might be that you have assets in or portfolios in taking a risk management approach and understanding what the fed reserve is doing is largely important in the these next couple years, because of what we're seeing and what needs to happen. I mean, look, end of the day, the M1 M2 money supply, the government has been putting money into the market. We are tapering the bond purchase, which means we are not buying bonds on the open market, putting liquidity into the market, which most people think all of a sudden that's like a terrible, it's a good thing over time to taper. We're not cutting it off cold Turkey. We're tapering. That's a good thing. But while we still have inflation, we will see more hawkish policies coming from the fed because we're gonna be in an interest rate, increasing environment. We have to right. Think about it.

We started this inflationary period last summer and over the past really 10 years at basically 0% interest rates. That's been the case since the great recession almost 13, 14 years ago. So, if you think about that, we have nowhere else to go, but up. So, it's important to understand how that impacts your portfolio, how that impacts your overall planning, which we talked about heavily here as well. And I think that's a really important topic, although again, I'm not saying go and watch CNBC or CNN or Fox news, religiously daily, just waiting to hear what the fed says, but understanding how all of that mixes in.

Number four, and this is gonna sound weird, but we wanna adjust expectations. Understand what's gonna happen in the next five or 10 years versus what we may have seen in the past five or 10 years. I've been talking with a lot of clients recently in our review meetings and something I've been saying that I think is really important to look at is if you look back just 10 years, just 10 years, okay. 2022, let's look back into 2012. What have we seen? We've seen a couple government shutdowns. We've seen a Syrian refugee crisis. We've seen a tumultuous election. We've seen a pandemic and that's just to name a few, yet over that time period, we've seen market produced double digit returns. We are spoiled, I have to admit. Starting back in 08, the 2001 and 2011 or that early two thousands time period kind of called the lost decade of investing. You gotta think about this after 08, when government stepped in, we've been a little bit spoiled. We of waiting for them to help us out again. Well, I don't care what side of the aisle you're on, it's almost like imprinted our brain that we're expecting these double-digit interest rates always and forever more.

And I just think it's important that we adjust expectations, not in a bad way, but many investors think about performance on an absolute return basis, but it's important to think about the concept of inflation and how that can impact your financial plans overall, like in the short term, does your income need to increase to accommodate for the increased cost of goods and services? For many of you listening, you might get adjustments in your pay, MOU updates, bonuses, it Cola costs, living adjustments that all factors into that, or does your plan account for inflation in the sense that will your portfolio be able to keep up with the rising costs? Something I mentioned in items one, two and three. Now is a good time to reengage with your advisor and if you don't have one, find one to build trust in and really ask if your plan is aligned with higher inflation expectations.

For our black book analysis that we do for our clients, our wealth management forecast, we look out on average, over 30 years of inflation around two and a half to 3% recently. We've had the discussions about increasing that even though 30 years is a very long time. So, although we're seeing reports of five, six, and 7% inflation, you have to average that out, all right. So, we still see a lower inflationary time period than what we're seeing in the past six months or year, but we're also maybe seeing a little bit higher than we've normally been seeing over the past 30 years. Like for example, you have to ask yourself will a 3% annual inflation like we saw over the past 20 or 30 years, will your portfolio need to do more to keep up if that number increases.

And lastly, I wanna talk about something that I touched on last week. This isn't necessarily one of the bullet points around ways to insulate your portfolio or investments, but it's just something to talk about that I think is really interesting. We at One Capital Management have exposure to this area. And as I mentioned before, some of the areas to maybe look at, of having exposure or increasing your, I guess, exposure to these areas, again, things like energy sectors or financials and materials, all of which that we have for our clients, but one area in particular that I'm really fascinated lately on. And I spoke again heavily last week. And one of the main areas that gets impacted during episodes or time periods of disruption, if you look about his history, this has been the case is technology. And it's been a lagging sector over the past couple years, but it's emerging again as a place of growth. And so having exposure there, understanding that is really important.

Technology had a significant outperformance during the COVID year of 2020, but it's been a little bit weaker since then, and we're seeing it firsthand. You know, any clients listening right now has heard me say this before I talk about the pocket investment, you know, wanna invest in Lululemon or Apple because you wear Lululemon or you use an apple phone, right. And that's all great and I'm not saying those are bad companies. But what we're seeing lately and as I spoke about this last week, we're seeing self-checkouts, kiosks, touchless, this touch list that, I mean, it's amazing what we're seeing in front of us. And it's an interesting thing to keep a pulse on as we look out into the future here, when it comes to things like wage increases, for example, the need for wages or employees versus just automating that process. So, I bring up that sector largely because it's just something that we've been looking at. And, and obviously we have exposure to, and I just wanna make sure everyone sees some of these areas that are around there that perform well in inflationary time periods.

And, you know, you wanna be more active and dynamic in what I mentioned earlier, one of the points of risk management, I mean, increasing equity exposure might make some sense. Not for everybody, but it's something to consider because the old notion of just being in cash, if you look at purchasing power risk, all right. And by the way, when I say cash, I mean cash that's investible cash, not cash that is your emergency fund or your three to six months of liquidity cash. So, we wanna look at managing the risk and if you use an advisor, you wanna ask them about their strategy for managing volatility and ultimately variability, which I think we'll see this year. And if you're invested in ETFs or those kinds of things, you wanna make sure there's a methodology for the risk management.

We have that here as part of our rebalancing strategy and that's something we do for clients consistently. So, if you're working with an advisor, that's something you should be asking them, especially in this time period. And if you're a client listening right now, when we go through our reviews and our discussions just know that's something we are heavily looking at. Now, no one has a crystal ball. No one's gonna know what's gonna happen in the next minute, let alone the next day or year or 10 years. But using fundamental analysis and the way we are able to look at the markets and disseminate what is going on and taking an objective and unbiased approach to managing assets wins out. There's an annual study that comes out each year called the Dalabar report, it's a quantitative analysis of investment behavior. And the latest do bar study show is that investors return in all equity funds for 20 years was a 3.49% average rate of return per year, while the S&P 500, the actual broader market returned 7.81% during that same time period.

The difference of nearly 4% or over 4% has to do with investors behaviour. Think about that for a second. What we do with our money has a lot to do with our emotions. We are emotional about it. It's okay, it's totally normal to admit. And that study shows very clearly that when we get involved us, as humans get involved, we tend to do the opposite of what we were once taught. And the one thing everyone of knows about investing, which is buy low, sell high, we tend to do the opposite. Not because we're not smart, not because we don't have the information in front of us because of our emotions. Having a tried-and-true plan, a system that is in place for your portfolio and for your planning matters.

I wanna thank you all for listening to the Make Your Money Matter. Remember before acting on anything discussed today, speak with a financial advisor and near you. And if you're not sure where to turn, you'd like our help visit us at onecapitalmanagement.com or give us a call (805) 409-8150. And until next week, remember Make Your Money Matter.

The information in this podcast is educational and general in nature and does not take into consideration the listeners' personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a final decision.

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