Quarterly Thoughts – Q1 2012
Are you taking the right or wrong risks? Inflation is one of the various and worst risks investors must consider in the long-run. Inflation is currently lower than historical averages due, in part, to the slow economic recovery. However, the prices of goods and services tend, eventually, to rise after a period of eased or stimulative government “monetary policy,” such as we have seen in recent years. Regardless of short-term aberrations, inflation should always factor in strategic investment planning… disciplined investing and understanding the tradeoff of protecting principal versus purchasing power is even more important when inflation rises.
Many aspects of life involve tradeoffs around competing demands. For example, a common lifestyle decision is whether to work longer hours or spend more time with one’s family. Which will have a greater impact on quality of life? And now vs. later? The answers often vary by person and by stage of life, but a conscious decision often leads to a better outcome. The same applies to considering financial risks such as inflation (as well as longevity risk and volatility).
Different people are “programmed,” by their nature, experience or stage of life, to experience different risks differently. Some interpret short-term market volatility as a sign of the future, triggering concerns about long-term goal achievement. Others see short-term volatility as an opportunity to increase long-term wealth through rebalancing, and may be more concerned about inflation causing a diminishing standard of living as a primary risk, knowing that inflation can be the silent killer of a strategic plan.
Investing is relatively straightforward when the definition of risk and the attitude toward risk are black and white. For example, one can virtually guarantee the preservation of capital by investing in the equivalent of Treasury bills as long as one accepts the corresponding potential for the loss of purchasing power. On the other hand, one can generally expect to preserve purchasing power by investing in asset classes with expected returns that exceed inflation over time, provided one accepts price fluctuations that can temporarily impair one’s capital.
However, people rarely have black and white objectives or well-defined and un-changing definitions of and attitudes towards risk. Additionally, some unrealistically expect long-term preservation of purchasing power and short-term preservation of capital. Making matters more complicated is that competing demands can shift in a person’s mind through time, often in response to what has happened in the recent past.
WealthStep’s education process, social media nudges and bits of wisdom, and disciplined investment process are designed to help you through these challenging questions, towards helping keep your life-goals on track.