Insight 1: You’re More Than Just a Consumer
Inflation has been everywhere in the news recently. From prices of gasoline and used cars to the price of food at restaurants, consumers have felt the pain of heightened expenses. But while most people conclude that inflation can only bring adversity, investors may find inflation to be a source of long-term growth. One of the primary sources of inflation is U.S. companies raising prices; with higher prices often come higher profits, which can lead to higher profit margins that benefit stockholders. 2021 was a great example: as inflation reached nearly 5% for the first time in decades, profit margins reached record highs and the S&P 500 returned almost 30%.
Insight 2: Prepare for Rising Interest Rates
One of the primary actors to ensure that inflation stops short of running away is the Federal Reserve. Their key tool for fighting inflation is to raise interest rates, and they have signaled plans to raise interest rates aggressively and rapidly throughout 2022. With higher mortgage rates, auto loan rates and borrowing costs, consumer demand will reduce, and the economy will cool. This is not the end for investors, but it will be a very different investment environment than the markets have recently experienced.
Insight 3: Keep Your Long-Term Focus
With rising interest rates and spikes in inflation, the markets have become more volatile. However, it is important to stay focused on your long-term strategy. Maintaining a financial plan allows you and your Baird Financial Advisor to adjust for both inflation and interest rates and to put yourself in a position to take advantage of a potential market rebound. It is also a great time to revisit a financial plan, adjust goals or review overall assumptions of the plan. Short-term worries do not necessarily need to interfere with investors’ peace of mind, but revising or creating a plan is a great step to take to ensure financial stability.
Insight 4: Reevaluate Debt and Mortgages
While focusing on long-term success, there may still be short-term steps that are beneficial. For example, as interest rates go up, payments on credit card balances or variable-rate loans will also rise. Now would be a great time to pay off outstanding balances and refinance to fixed-rate loans. While mortgage rates have been increasing, they are still historically low and can be locked in using a fixed-rate loan. Be aware, though, that higher rates may require a larger down payment or monthly payments than what you had initially budgeted for your new home – plan accordingly.
Insight 5: Assess Asset Allocation
Given the pace of inflation, investors may want to revisit their portfolio mix. In this market, you may wish to consider stocks, as the returns from increased volatility can help counter inflation. Consult your financial advisor to determine what asset allocation is best for your time horizon and risk tolerance. For the short term, you may also wish to build up your emergency fund or contribute to a savings account, which typically benefits from rising interest rates.
If you would like to create a financial plan dedicated to your long-term success, or you would like to reassess your plan, contact your Baird Financial Advisor.
The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.
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