The Emerald Way: Risk, Reward and Inflation

Financial Planning: Risk, Reward and Inflation

Whether we realize it or not, risk is part of everyday life. Whether you’re buckling your seatbelt to drive across town, bungee jumping, or taking a prescription drug, most of us automatically balance risk with reward daily. 

Investing is not that different. Every investment carries risk, and we need to weigh the risk with the likely rewards. When we add in the buzzword of inflation…what does that do to your perceived balance of risk/reward? Many of us have lived through low inflationary periods, with 10-13% mortgage rates. We remember what inflation was and does to your wallet.

Our firm uses a disciplined approach to managing risk and rewards. We also are mindful of inflation and how that impacts not just your stock accounts, but the fixed income side of the portfolio, which is by nature what we consider the safety net. As an example, people tend to think of cash (or a savings account or CD) as a low-risk proposition. With the rise of inflation, holding cash means you are accepting substantial risk. Why? Well, if you put a million dollars under the mattress, in one year, you’ll be left with less spending power thanks to inflation.  More specifically, if you’re getting 0.5% on your money but prices are rising an average of 5%, you’re going backward.  The longer you hold that cash or low-yield investment, the more purchasing power you’re losing. Just as positive investment returns compound your wealth, inflation erodes it. For the past several decade’s inflation has taken a back seat with modest year-over-year increases, yet when inflation hits 5, 6, 7% in a year, it becomes an invisible force.    

In the words of Ronald Reagan: “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hitman.” 

Let Financial Planning Drive

As financial planners responsible for helping to secure our clients’ futures, we believe purpose should always drive your investment strategy. You have to know where you’re going before you can establish a roadmap to get there. That roadmap then helps define the boundaries of your investment plan, including how much risk to take. 

That’s important, since much of Wall Street focuses on returns, with less attention paid to risk. That can be a critical error since a mistake can impact your ability to live the way you want. 

All too often, we encounter new clients who already have significant resources taking more risk than they need to. Risk management should always be paramount since you don’t want to risk losing money you can’t easily make back.    

Tips for Managing Risk and Reward

When it comes to planning your future, it is wise to focus on what is within your control.  Here are our tips to get the balance right.

1. Prioritize your biggest goals. Planning should always drive your investment decisions. If you’re in or approaching retirement, your risk should be kept on a much tighter leash than if you are in your 30s with decades of time until retirement. Are you already on track to achieve your goals? If so, you may not need to take as much risk. Why risk unnecessary financial setbacks when you don’t have to?
2. Don’t fight inflation. We can’t ignore inflation, we have added commodities and a larger allocation of real estate to our portfolios.
3. Maximize tax efficiency. It’s not what you make, it’s what you keep that counts. One of the best (and lowest risk) ways to improve your results is to invest tax-efficiently, so you can keep more of what you earn in your own pocket. As your advocate we have implemented tax efficiency into every step we take for you! Though, don’t let the taxman dictate rebalancing your portfolio to take risk off the table!
4. Don’t forget about fees. Along with taxes, fees and costs can erode your wealth too. So returns should always be considered on an after-tax, after-fees basis. We utilize the lowest cost exchange-traded funds as well as a stock portfolio designed for today’s market.
5. Allow room for riskier pursuits. We find many clients want to participate in some of the more popular investment trends. We understand and recommend a small allocation to an account earmarked for higher-risk purposes. That way, you can invest freely in the popular high-flying stocks with that money. Even if you sustain a significant loss, it won’t impact your lifestyle.

Putting It All Together

The world doesn’t stand still and your financial plan shouldn’t either. Instead, it should change as your life circumstances and market realities change. For most people, that means checking in with us to make sure you’re prepared for whatever the future brings. While it can take a little of your time, you’ll find that it will pay dividends in peace of mind when you’re clear on what you own and why you own it.