Inflation
Inflation presents one of the most serious risks
to every retirement portfolio. When calculating the risk in a portfolio,
we are always aware of the economic conditions that lead to the
worst outcomes. Inflation is the largest danger, both in terms
of the probability of it occurring and its economic impact, particularly
on retired people. Even if it only averages 3.2% over your retirement,
in 23 years your income will have to double just for you to stay
even. In our experience, in analyzing hundreds of common retirement
portfolios, it looks tenuous as to whether the average investor’s
portfolio and spending will withstand even average inflation.
What happens during rampant inflation?
Then there are those rare times when inflation goes substantially
above average. These time periods literally kill most retirement
portfolios. This is the reason why inflation was recently listed
as the number one financial concern in a poll of retired investors.
They are correct.
At Secure Retirement, we carefully consider the impact inflation
will have on each investment in our portfolios. We also carefully
calculate the risk inflation would present to the entire portfolio,
i.e. how much it could go down at the 99.9% probability, which
basically tells us how much of their assets people are likely to
lose in a highly inflationary time period.
Equities
Two-thirds of our equity investments are designed to either withstand
or go up substantially during an inflationary time period.
Fixed Income
The fixed income side is somewhat more complicated, as inflation
hits the bond market particularly hard. Since retired investors
typically have substantial bond holdings, this is another reason
why retired people are justifiably concerned about inflation.
| 1. |
Our core bond fund, Loomis Sayles Bond,
is managed by someone who we believe will anticipate an
inflationary period and will act accordingly. He is more
aware of inflation risk than anyone we know. Plus, there
are always good bond deals available somewhere in the world,
and we believe Mr. Fuess will continue to find them and
make money for us, even if the U.S. market should become
depressed. |
| 2. |
We also use Loomis Sayles Global Bond as an excellent
hedge against inflation. This fund has gained 10.4% a year
over the last five years , and will most likely spike upward
during an inflationary time. It most likely would also
do exceptionally well should there be a dramatic reduction
in the value of the U.S. dollar – something that
concerns leading economists at this time, due to trade
imbalances and U.S. Government debt levels. |
| 3. |
Finally, we use Vanguard Inflation-Protected Securities,
particularly in our conservative portfolios. This is clearly
the most certain protection against inflation, as the price
of these U.S. Government bonds goes up directly with inflation,
as measured by the Consumer Price Index. It does not get
any more secured and certain than this when it comes to
inflation protection. However, this fund does not have
the return potential our other funds offer over time. For
example, you cannot find underpriced bonds with excellent
growth potential in inflation-protected securities, as
there are only a few series of these bonds available in
the entire U.S. market. |
When we combine these three bond funds, we believe they all
offer sound inflation protection. Combined with our equities,
our goal, and our expectation, is that our portfolios will
be left standing strong during and after an inflationary time
period.
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