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David Blanchett and Michael Finke

Portfolio > Economy & Markets

Don’t Get ‘Too Fancy’ When Protecting Portfolios From Inflation: Finke

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What You Need to Know

  • Michael Finke and David Blanchett focus on long-term investment performance.
  • Now is a good time for retirees to ask how their portfolios are positioned for inflation, Blanchett said.
  • He also suggests that advisors ask clients about their flexibility with expenditures.

Financial advisors don’t need to get too tricky in helping clients find investments to counter high inflation and should stay focused on long-term portfolio performance, says Michael Finke, wealth management professor at The American College of Financial Services.

Finke addressed ways to approach high inflation during a podcast Wednesday with retirement planning expert David Blanchett, who noted that those in their working years already have a great hedge — their own human capital.

“You can get fancy, and fancy may work, like shifting from more of a growth strategy to more of a value strategy — that may make a certain amount of sense — but you can get a little bit too fancy when it comes to inflation protection and keep your eye off the ball in terms of the long-term success of an investment portfolio,” Finke said.

“You can do things to show your client that you’re aware of the risk of inflation while at the same time not making massive changes in your portfolio that are going to end up having negative long-term consequences,” he added.

While stocks historically perform well long-term, they’re inconsistent and not a great hedge when performing poorly, Finke said. It’s probably worth paying attention to how different types of investments have performed historically and not get caught up in the expectation that the equity risk premium will outperform inflation reliably, he said.

Blanchett, managing director and head of retirement research, DC Solutions, at Prudential Financial Inc.’s asset management business, PGIM, indicated that he’s making no big changes in his  own portfolio to gird against extended inflation.

“I am doing absolutely nothing, I am a long-term investor. I have a very, very good inflation hedge in my human capital. Individuals who are younger who are working, over time, if there’s inflation wages tend to rise,” Blanchett said. “I don’t have to access savings for any reason.”

Retirees: Pay Attention

Retirees who have to use their savings to fund retirement, on the other hand, could be materially affected by inflation, and now is the time for retirees to actively ask how their portfolios are positioned for an extended high inflation period, he said.

While cost-of-living adjustments to Social Security can help retirees fight inflation, Blanchett noted there are no private annuity products that offer explicit benefit increases for lifetime guaranteed income attached to inflation.

Retirees can buy annuities that provide the potential for income increases based on underlying assets’ investment performance, but “that is a current weakness of the product landscape,” he said, referring to the fact that investors can’t buy private annuities with income  guarantees that rise with inflation, Blanchett said.

Retirees should pay attention to which retirement budget expenses change and don’t change with inflation, Finke said, adding that annuities can fund nominal increases in costs.

Blanchett suggested advisors ask clients about their flexibility with expenditures. General inflation might not affect a retiree much, but they might have to cut back in some areas. The less flexibility you have, the more you need your savings tied to assets that move with inflation, he said.

The two experts did touch on investments that might mitigate inflation, with Blanchett citing explicit hedges, like I bonds and Treasury inflation-protected securities, and implicit hedges like equities and real assets.

Consumer durable stocks tend not to do well when the Federal Reserve raises interest rates, while consumer staples and stocks tied to commodity production tend to do better, Finke said.


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