February 28, 2022

Record-high inflation, rising interest rate fears and spiking geopolitical risk over turmoil in Ukraine are an obvious recipe for market volatility. For rattled investors, it may be beneficial to shift your focus from the short-term clamour to the long-term horizon, particularly if you experience stress from dramatic market swings.

Viewing the current environment in the context of your long-term wealth plan can help minimize anxiety and the chance you’ll do something rash, such as converting funds to cash during a market low. Investors who overreact will likely face a longer recovery period and may experience tax consequences.

However, maintaining a long-term perspective also means testing your portfolio for resilience. We run simulations to identify potential weaknesses under a range of geo-political, market and economic scenarios. With that, we can make adjustments to fortify your plan, maximize the potential to achieve long-term objectives, and give you the confidence to stay invested.

Is your plan resilient?

2022 so far has been defined by market turbulence, soaring inflation, spiking omicron cases, broken supply chains, and Russia’s invasion of Ukraine. Investors are likely to see more collateral headwinds in the coming months as these factors unfold and new risks emerge.

Despite looming Federal Reserve rate hikes and quantitative tightening measures, fundamental earnings growth and other factors indicate we may return to a more “normal” economic state. 

One reason for a positive outlook is the U.S. Department of Commerce’s estimate that 2021 fourth quarter GDP increased by 6.9%, ahead of its projected rate. In addition, the fundamentals of US large cap stocks appear to be solid.

It’s a good time to revisit your wealth plan and ask, “How could the current world impact my long-term preservation of capital, growth, and goals?”

Finding solace in simulations

Our interactive wealth planning tools incorporate your assets, cashflows, and future expenses – projecting them over your lifetime. The projections show the expected value of portfolio assets in any given year, as well as the likelihood that your plan will meet your objectives.

As wealth planners, we use scenario analysis to test your plan’s ability to withstand a range of conditions, such as high transitory inflation, increased long-term inflation and interest rates, a short-term market correction or lengthy bear market and long-term performance returns that are less than historic averages. These simulations reveal your plan’s level of resilience.

Many clients voice concerns to us about inflation. According to the U.S. Department of Labor, the Consumer Price Index, which measures the average change in prices of consumer goods and services, increased by 0.6 % in January. In total that amounts to a 7.5% hike from a year ago. Even so, understanding the potentially corrosive effects of inflation on your plan is far more complex than a single data point.

Our analysis can look at the impact, for instance, of long-term inflation at 3% to 4% and a transitory period lasting a couple years of inflation at 5%. What happens to your purchasing power if inflation comes down from 7.5%, but settles at 4% instead of returning to a more traditional 2.5%, while your income fails to keep pace?

Long-term goals are funded with income streams, savings, and portfolio withdrawals. If your sources of income are fixed, your purchasing power will dwindle with rising inflation. Annuities that have been annuitized pay a fixed amount, while the value of pension and supplemental executive retirement plan (SERP) payments likely decrease over time.

The purchasing power of any money you have ‘stuffed under your mattress’ will decrease each year. The same is true for savings and money market accounts whose interest rates tend to be lower than inflation. Additionally, costs that impact long-term goals can inflate at different rates, such as healthcare costs, which consume a larger percentage of your total expenditures as you age.

No need to panic, our wealth planners are here to conduct a thorough review of your plan on a regular basis. We aim to help keep your long-term objectives resilient to inflation.

Keeping perspective; taming turbulence

It’s okay to feel the urge to pull out of the market but in most cases, we recommend staying invested, particularly if you rely on your portfolio to fund your lifestyle. Parking cash will earn a near-zero yield. Instead, ensure that you have access to funding in the form of cash, credit, or other liquid assets. Liquidity is key to riding out market storms.

As a rule of thumb, if you are building wealth with dual income in an expansionary economic environment, you’ll likely need less than 12 months of liquidity. Retirees’ dependent on their portfolios will likely need 18 to 24 months of liquidity. Each situation is unique, and your circumstances will dictate what constitutes an adequate amount of liquidity.

It’s also important to diversify income streams. Income from rental properties, for example, can rise with inflation – along with property values. Generally, stocks are positively correlated with inflation. You should also consider scenarios that incorporate changes to your risk tolerance, which may change with age. You may need to adjust your allocation to a more appropriate risk/return profile.

It’s easy to lose perspective when turbulence strikes and allow anxiety to distort your view of market opportunity. But with the right tools, we can gain a detailed picture of your potential to thrive over your lifetime. Let us help you fine tune your plan to increase your portfolio’s resilience and boost your ability to weather market storms.

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