SPECIAL REPORT ON INFLATION, Part 2 – What Can You Do to Protect Yourself?


Only when you combine sound intellect with emotional discipline do you get rational behavior.(Warren Buffett)

Inflation impacts all of us. The cost of living continues to increase as goods and services become more expensive. Often, wages are then boosted to keep up with inflation. As the cost of labor and supplies for businesses increase, these additional expenses are passed along to consumers. As inflation evolves, it brings more uncertainty, anxiety, and concerns. It can influence behavior and decision-making: business owners may wait for prices to stabilize to invest and grow; consumers may rush out to stock up and buy more goods, before prices go up, thereby increasing demand further. If demand exceeds supply and shortages occur, then prices will again continue to inflate. Inflationary environments may become a vicious cycle.

In response to the above cycle, the Fed usually raises interest rates to combat inflation. These rate hikes increase the cost of borrowing and can slow economic expansion and growth. While the Fed has learned to inform consumers and the market of its intentions to ease uncertainty, a higher inflationary environment brings greater volatility to both stock and bond markets.

So, what can you do to endure in this environment? We offer general guidelines below as specifics will be based on your unique financial circumstances. In any inflationary period or downward cycle, there are important points to remember, as well. We will address well understood psychology, fundamental financial planning, and touch upon a few advanced techniques. Our role is to help you balance a personal mix of strategies and create clarity for you. Clarity brings confidence!

Risks exist whether you invest or do not. The following is an example highlighting how even holding excess cash reserves has risk. To make our point clear, we will be referencing a standard economic principle. If a money market account earns 1%, while inflation is at 8.5% (which it is as of this writing), the account is really losing 7.5% in real purchasing power. For those of you interested in the economic formula: N-I=R or Nominal (stated) returns minus inflation equals R or Real returns, after the impact of inflation.

Understand and Minimize Emotions

During times of stress, such as those we are experiencing today, we often hear questions from you about the future. We all have them. While we do not have the proverbial “crystal ball”, we do know that successful investors focus on their needs and goals and what is understood about the markets. This section provides these insights.

  • It is worth noting that market returns are cyclical and have always trended higher over the longer-term. Markets never remain in one place for long periods of time.
  • While you cannot control the economy or the markets, you can control your behavior, attitude, ability to plan and, if necessary, adjust your plan.
  • Be engaged in your planning! Revisit your goals, timelines, risk tolerance – how much market volatility you can tolerate, and risk capacity – how much market volatility you can take. Stay focused on your goals.
  • Set your investment expectations for lower market returns during these periods. It is best to be more conservative when forecasting your performance expectations to meet your needs.
  • Think independently and do not be influenced by others who know less than you regarding your personal circumstances and solutions reflecting dynamic economic and market conditions. Be calm.
  • Do not be roused by the media. We repeat this often; it is one of our mantras.
  • Do not attempt to time the market. It is very difficult to determine when to get out of the market and even more difficult to know when to get back in! Former renowned mutual fund manager Peter Lynch was reported as once saying that “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections, than has been lost in corrections themselves.”
  • Remember that losses on paper are unrealized until you exit those positions. Do not make dramatic changes to your portfolio during an inflationary period or economic downturn unless your risk tolerance, goals, or timelines change.
  • Even though we will experience difficulties along the way, stay positive. The economy and markets are resilient. They bounce back. Eventually, price stability will reappear, optimism returns, and order is restored.

Implement Definable, Executable, and Repeatable, Effective Financial Planning Strategies

Volatility may persist for bonds and stocks in rising inflationary environments, and when the pace of economic growth or output changes, the markets must contend with even more complexity. The following techniques are used to address your various needs during such times.

  • Liquidity – Always have an adequate emergency fund for quick access to liquidity in the event of cash flow shortages, short-term needs, or unanticipated expenses. This is a staple for your financial planning strategy.
  • Review your budget to live within your means. If inflation persists, review it again. Understand the difference between listing and accounting for your expenses versus budgeting. To know your expenses is different than budgeting, which requires adjusting your expenses based upon your actual needs.
  • Make sure your debts are manageable. As interest rates rise, so does the cost of debt. Avoid credit cards if possible. Consider establishing a securities-backed line of credit for emergencies and unforeseen expenses.
  • Reduce portfolio volatility with a personalized mix of diversification and hedges. Diversification helps with unknown or uncertain risks. Hedges address those that are more apparent. We embrace a multi strategy portfolio for most of our clients, including passive and active approaches with a great metaphor – sailing AND rowing strategies. Sailing works well when the weather is breezy and the waters are calm, while rowing works better in storms and choppy conditions. Since we cannot predict the waters (markets), it’s best to be prepared to do both. Do you know the name of the ship that uses both sails and oars? Hint: what do you call an ancient Viking ship?
  • Continue to make systematic ongoing investments like you would with an employer-sponsored retirement plan, even in declining markets. In doing so, you will be exercising the time-tested strategy of dollar cost-averaging. As stock prices decline you will be buying more investment shares at lower prices and participating in market recovery/growth with more shares in your portfolio.
  • If you want to participate in market growth and to preserve against market losses, or lifetime increasing income even if your account is depleted, or to lock in the highest value of your account while it remains invested for your heirs, consider a contractual investment with an annuity. They are not all the same and sometimes they are very helpful, particularly, for inflation.
  • Use a multi-bucket approach to segment your assets and match them to their intended uses over time. Having different accounts (buckets), allows you to plan for and provides liquidity with conservative investments and extra recovery time for growth investments experiencing volatility and market downturns. This is an intuitive method of investing and covered in our book “Guided Retirement Income Planning.”
  • Equities may be appropriate to work as a long-term hedge during inflationary environments, especially those companies producing goods and services needed in all economic environments: food, credit card companies, etc. Well run companies with strong balance sheets and dividends tend to perform best. The goal is to have investment returns that can exceed the inflation rate over a business cycle.
  • Owning alternative investments such as commodities (gold, precious metals, timber, oil…) or real estate can offset inflation risk. Managed futures and hedge funds may as well. Your home is an example of an asset that has lower correlation to market performance. We have been asked about cryptocurrencies. At this moment, we neither offer nor endorse them.
  • A short-term thematic investment with exposure that is defensive or opportunistic can help. Unit investment trusts (UIT’s) are investments that have short holding periods and then mature. They can be used to target timely strategies.
  • With a highly appreciated non-retirement portfolio, market volatility may present a unique opportunity to consider tax harvesting and rebalancing your account. Past realized and currently unrealized losses may be used to offset taxable gains in your portfolio. A retreat in the market can reduce your taxable gains and allow you to offset more of your portfolio with losses to rebalance your account for the future.
  • A Roth IRA conversion is a tactic we frequently use and present in our writings. One of the best times to convert all or a part of your Traditional IRA to a Roth IRA is when markets are depressed. Perhaps this dynamic environment, fraught with inflation, is the right time to implement this strategy. You would prepay your Traditional IRA taxes now on lower values, transfer the proceeds directly to a Roth IRA, and pursue tax-deferred portfolio growth for the future. When setup properly the Roth IRA, unlike Traditional IRA, will allow tax-free distributions or bequests to heirs and may protect against future tax increases.
  • Permanent life insurance comes in many forms. The latest policies offer capped market-indexing investments with zero downside and may be helpful with overcoming the impact of inflation. These policies may serve as conservative growth alternatives to bonds and stocks. In addition to death benefits and portfolio diversification, they may include important living benefits and access to cash value for your overall financial and estate planning needs.


We help by guiding you and providing suitable strategies, knowledge, and clarity, and instilling confidence, especially during times of uncertainty. We encourage you to stay connected with us for periodic discussions about your needs and goals. Let us know what is on your mind. We can help you, loved ones, and friends-in-need when we collaborate.

All our best,

Adam L Schwartz, Partner, CFP®, NSSA®
Barry E Moschel, Partner, RICP®, CLU®, ChFC®, CPA