The Wiser Financial Advisor Podcast

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Should I Change My Investment Strategy To Fight Inflation

Have any concerns about how inflation might require adjustments in your investment strategy? Truth is, you might need to make some adjustments to keep your investment strategy heading in the right direction.  In this episode, host Josh Nelson talks about the possibility that inflation can mean you’ll need to assess how your strategies are going to hold up given that the economic experts are forecasting that our current situation with inflation is here to stay, at least for a good while. He also offers practical advice on how to tell if you’re okay where you are or if you might need to think about tweaking your strategy.


Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.        


This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we’d love it if you would pass it on to me directly: . Also please stay plugged in with us, get updates on episodes and help us promote the podcast. You can subscribe to us at Apple Podcasts, Spotify or your favorite podcast service. 

Let the financial fun begin!

Hopefully you are having a festive and fun holiday season. I know my family and I are having a good time as we do all the normal stuff—playing Christmas music and putting up the tree, just doing fun stuff together.

Well, this past week it was reported that the inflation rate in the US has risen to 6.8%, which is the highest number that we’ve seen in 39 years. Some of you are old enough to remember during the late 70s and early 80s, the inflation rate was very high. Mortgage rates and CD rates, all the interest rates were high; they went way up into the teens. Those of you who had a mortgage or had money in CD’s back then were probably looking at high rates, because things were pretty ugly economically at that time.

We’ve been spoiled for quite a while, but now high inflation is back. We’re going to talk about investment strategies for fighting inflation today. But before we get into that, I’d like to tell you a little bit about Keystone Financial Services. We are a wealth management firm. In fact, we are one of the largest wealth management firms in Northern Colorado. Our mission is to bridge the gap between knowing and doing in the financial lives of our clients. What that means to us is that we’re here to provide unbiased advice and guidance. And even though we’re one of the top wealth management firms in the area, we pride ourselves on focusing exclusively on your needs, your family’s needs, and taking a look at your individual situation. Our goal, overall, is to replace uncertainty with confidence when it comes to your financial planning. So I recommend you give us a call. Don’t try to do this investing thing by yourself. Often, it doesn’t work out so well when people try to be their own financial advisor, even though it’s tempting and there are plenty of messages out there telling people they should be doing that. The reality is that the vast majority of wealthy people in the United States have a great financial advisor and they say that is a huge part of their financial success. So take the guesswork out of your financial future and contact us today.

Okay, inflation. There are a few reasons that inflation has gotten bad. In very simple terms, inflation is caused by too many dollars chasing after too few goods. Some inflation is good. You don’t want deflation, which is the opposite of inflation. Deflation means that prices are dropping in general. The economy is going backwards and you definitely don’t want that. But high inflation is bad because it erodes people’s spending power. We expect to be paying more for stuff over time, but if it’s a lot more, then unless the economy is growing faster than inflation and people are getting raises and income that surpasses that inflation, everybody’s standard of living is going backwards. That’s what we’re experiencing right now.

Before we get into strategy, let’s talk about inflation and what’s going on right now. Trillions of dollars have been injected into the US economy through monetary policy, which is controlled by the Federal Reserve, and through additional government spending, which is controlled by Congress. So that’s too many dollars.

There are lots of dollars flying around out there right now at the same time as there have also been too few goods because we’ve had supply chain interruptions due to shutdowns during COVID. There isn’t enough product out there for people to buy what they want to buy, and I’m sure you have examples of that. Grocery store shelves aren’t full like they used to be. Or maybe you’re trying to buy a vehicle or trying to build a house and you can’t get the materials. My wife and I were actually working on a kitchen remodel for this next summer and we just went to get appliances. We picked them out and they have a six month lead time. We’ll be lucky if those appliances show up on time. The other thing we’re experiencing is that employers can’t get enough workers. There are 10 million open jobs in the US, and only 5 million people looking for those jobs. And of course, when you’ve got 330 million people in the population and a bunch of those people are of working age, there will always be people in job transition. Certain industries and companies are downsizing, people might be relocating—there are all kinds of reasons why there are folks looking for jobs. What that means though, is that we don’t have enough workers to fill all the jobs. And when I talk to business leaders, which is often, they tell me that one of their biggest challenges right now is they just can’t fill positions.

If you think of just one area as far as the supply chain, look at truck drivers and dock workers. There’s a huge undersupply right now of workers in that sector, and that’s been the case for a while. That’s not just a COVID thing. It’s gotten much, much worse and product is not moving like it used to off the docks. We know about the container ships stuck off the coast of Long Beach. That’s still a big problem. Probably will be for a while because they can’t get enough workers to get the product off the ships.

So you look at all of this, and it really is this perfect storm that’s created an inflation problem. You can’t point to just one thing, but at the end of the day it comes down to too many dollars chasing too few goods. The reality is that it might last for a while. This is probably not going away overnight. If you listen to different economists, they have different opinions of course, but overall the experts we pay attention to are telling us that this is not transitory. Last summer the Federal Reserve was saying that inflation’s up but it’s transitory. In other words, it’s temporary and won’t be here very long. They’re dropping that term right now because they’ve realized that isn’t the case.

Inflation is going to be here for a while, and we’re already seeing some tightening that’s going to be happening. The Federal Reserve is changing monetary policy. They’ve been buying tens of billions of dollars’ worth of bonds over the last couple of years to try to inject additional capital into the economy and keep the money supply very loose. That’s probably helped some. There are some different opinions on that. It’s called quantitative easing, which means that the Federal Reserve buying bonds creates more cash and keeps interest rates lower than they normally would be. But they are starting to back off on that policy now. They had planned to go through next summer, but now they’re probably going to wind down that program by spring, if not sooner. They are also gearing up for increases in interest rates, which are still at zero right now. They will probably increase interest rates here in 2022. They might even be increasing rates dramatically.

That’s what happened in the late 70s and early 80s. The Federal Reserve stepped in and jacked up interest rates to kill inflation. It worked but it did bring on a recession because when the Federal Reserve tightens things, that does affect the economy. It kills inflation, but it also can kill the economy temporarily. So, be prepared as we go forward.

Moving on to our question of the day, a question that as Certified Financial Planners here at Keystone, we’re hearing from a lot of clients. “Do I need to change my investment strategy to fight inflation?” Not only is inflation all over the headlines but also, when you go buy gas or groceries or pretty much anything right now, you’re seeing higher and higher prices. Gas and food are the ones that are the most in our faces, right? Because we’re buying those things the most often.

So the question comes up: “Should I change my investments or my investment strategy to fight inflation?”

Well, maybe, but maybe not. We need to back up first before getting into answering that question. I can’t answer that for you, by the way. Ultimately, that’s going to come down to you. It really is about trying to figure out the answer to that question for yourself. We’re never here to tell you what you have to do or what you should do. Our job is just to guide you. We’ll give you our opinion. We spend a lot of time at this. I’ve been doing this for 22 years, which means that I’ve not only had to go through an awful lot of different economies and markets and so forth, but I’ve seen a lot of the human side of things in working with people and having thousands of interactions with people both in group settings and as individuals. That means I get to know what works and what doesn’t, and some of the pitfalls that people fall into when it comes to trying to figure out what to do.

So to back up a little bit, let’s think about how your portfolio was designed to begin with. I can tell you from my experience that the average American’s investment strategy is called luck. It’s just kind of winging it. It isn’t something well thought out. People probably have no idea how much risk they’re taking with their portfolio. Of course there are exceptions to this. There are people that, whether they’re doing it on their own or working with a financial planner, sometimes have thought it out really well. They put in a lot of research, a lot of homework and arrive at a well thought out plan. But the average person that I sit down with for the first time doesn’t really have any idea. And if that’s where you are right now, that’s perfectly fine. In fact, I think it’s good that you’re acknowledging the fact that you don’t really have a plan right now.

Often, when people come in and meet with us, they have never worked with a financial planner or advisor before, which is also fine. They probably had good financial habits, meaning that they put a lot of money away over time and paid off their debts to get themselves into a good financial situation by not spending all their money like the average American does. Still, they might not have a well thought out financial plan and they’ve gotten to the point where they realize the importance of doing some comprehensive planning, and that involves meeting with someone who can guide the process. It isn’t something that most individuals have the time to understand, and probably don’t even want to.

That’s the reality for most of our clients. Financial planning is not something they want to make their hobby and spend their whole retirement and all their extra time doing.

So, backing up and thinking about how you arrived at your current portfolio is probably good. And when we bring people on as new clients, one of the first things we do is have them use a tool we’ve created on our website. ( .) About halfway down the page there is a button in a red box that says, find out your number. You can go in and it’s a quick process that takes just a few minutes. You can do it on your phone or your computer to determine your unique risk number. It’s scientifically created to balance out approaches to risk and return. You’ll be looking at what kind of return on average you want to get out of your portfolio. Of course, you might be guessing, but that’s OK. It’s a starting point. It also asks how much risk you want to take. What it’s measuring there is how much money you’re willing to lose during any given period of time. We’re not going to take all your money and put it in a roulette wheel or something like that, which would be the equivalent of putting all your money in one thing, like putting all your wealth into Bitcoin or all your wealth into one stock. With business owners, for example, or for somebody who owns real estate, they may have all of their money in one property.

That’s why it’s kind of hard to be a real estate investor by buying single properties. Most people don’t have the money to go out and buy enough properties to properly diversify. We’ve got financial strategies regarding investing in real estate, as far as how to invest without having to be the landlord.

Anyway, when you take that risk analysis, it’s going to spit out your number. Your number measures the amount of risk you’re willing to take for your portfolio. Sometimes when you get your number, you say, “That’s not me.” And the program will let you go back in and make some adjustments, so it’s not set in stone. I highly recommend you do this. Even if you’ve done it in the past, go back and do it again. You can do it as many times as you want, to educate yourself and feel good about where you are. The ultimate goal is to create a plan that is really likely to make enough money so you never run out when you are ready to be done working—and when it comes to strategy we like to look at those two factors: risk and return. The risk we’re talking about is diversified risk, meaning whatever you’re investing in, you’re going to be diversified. Regardless of what your risk number is, it’s important to be diversified so you don’t have all your eggs in one basket.

Let’s say someone takes that risk analysis and it comes back with a number 99, which is willing to risk everything at any given time. Well, I can tell you that the only way to get to 99 is if you’re willing to put all your eggs in one basket. If you put all your money on Bitcoin or on one single stock, for example, that’s probably going to push you up to that number. Doing that is kind of reckless, because eventually something bad is going to happen. If it hasn’t happened yet, you’re lucky. And of course, when people come to us that have all their money in one thing, if they’re listening to us, they’re going to diversify out that risk and put it into a more thought-out portfolio.

Let’s say your number comes out to a 75 or 80. You probably would have almost all of your money in growth type investments like stocks and real estate. People that are already at that level wonder if they should take on more risk at that point. Well, we don’t like to drive faster than 80 miles an hour. Once we get past 80 miles an hour, risk goes up dramatically and it goes up to the point where it’s not really worth it. That’s the tradeoff, really, and our analysis and experience say it’s just not worth it to take on additional risk once you get to that level.

Let’s say you took that risk analysis and it came out relatively low—at 1, for example. I can tell you the only way to get to 1 is by putting all of your money in the bank. It’s going to be in CD’s, savings accounts, things like that which are 100% guaranteed to have no risk whatsoever. And right now you’re also going to get no return whatsoever. It’s going to be extremely low and very hard to outpace inflation of the kind we’re seeing today. If you think about that 6.8% number, if that’s the right number and if your money is all sitting in cash right now in the bank earning zero or close to zero, that means you’re going backwards by 6.8% per year. You’re losing 6.8% per year because of inflation, so be thinking of it from that perspective. That’s one reason not to keep too much money in cash, because cash is not an investment that’s protected from inflation. It bears mentioning that there are situations where people just have so much money accumulated that maybe it doesn’t matter to be losing 6.8% per year. They’re still going to be OK, and they’re not going to run out of money.

Cash is a good place for your safe money and we always recommend people have a good nest egg level cash reserve, which would be three to six months’ worth of living expenses. That’s the number we normally recommend but it does depend on the situation. Maybe we go up to 12 months’ worth of living expenses and add to that any known expenses. If you need to buy a car in a couple of months or you have a major home improvement coming up, or you’ve got something else kind of crazy going on, you might need to have more cash than that three to six months’, but that’s a pretty good rule of thumb that would cover most people for short term emergencies.

In talking about investments, we’re not talking about those emergency funds. We’re talking about the longer term money that you will be counting on using, probably over years if not decades, throughout your retirement. So, if your risk number shows up as low, let’s say it’s the 1, then we need to do some math. We will need to change your approach to be able to reach your goals. It’s important that we look at each individual situation and what people want. How much do they want to be able to spend in retirement? When do they want to retire? What other income sources do they have? It’s possible that maybe being at a 1 is appropriate for them. Maybe that’s where they should be, just letting their cash sit in the bank.

Often, when people take this risk analysis we’ll see a relatively low score such as 25 or 35, somewhere in there. Those are the people asking us the question, “Is my risk number too low? Based on the inflation numbers we’re seeing, I’m just really concerned. Are we not being aggressive enough to be able to outpace inflation?” And that might be the case. We might need to run the numbers again, look at your individual situation. But then it comes back to that question I brought up at the beginning today: “Should I change my investments to fight inflation?” Well, possibly. Take that risk analysis again so we can look at something objective rather than emotional. Because oftentimes people make their investment decisions based on emotion, and that is not a good way to invest. Because what they’re normally doing is investing and taking on more risk when it feels good and then bailing out and selling when things don’t feel so good. That means there are a lot of people that end up selling after the markets drop 20, 30, 40, 50 %. People want to bail out at that point because they’re so scared that they’re worried about losing all their money. In the past when the markets dropped 50 plus percent, that was often close to the bottom, and people who made the decision to sell were unhappy with that in the long run.

The other approach people tend to get into is to take on more risk when things get bad. That’s not a good investment strategy either. And that is why we have you take that risk analysis to begin with. Of course we want to get good returns for people, but we need to figure out how much risk you’re actually comfortable with when things get terrible and uncertain in the world. That’s the point where people tend to capitulate and say, “Alright, that’s enough. I just can’t take anymore.” And that’s what we’re trying to avoid, and why everybody isn’t invested at 75 to 80 miles an hour. The reality is that people have different emotions. People have different motivations. People have different feelings about their money and about their lives and situations, the economy and politics—all those things. Everybody has a different outlook. We need to figure out what motivates people or what people are comfortable with on the downside and what they’re going to do, how they’re going to react when things get uncertain. So it’s very important to know how much risk you’re taking on in your current investments, and to make sure you know what to expect as far as what return potential you have.

We spend a lot of time with people on this. That’s why we’re talking about it today because it’s so important and we’re hearing so much of this from people we’re speaking with, especially new clients that have joined us recently. And I want to say thank you to all those of you that have told your friends and family about us. It’s an honor to receive those introductions. The whole reason we’re doing this is because there are just a lot of people that need help. I got into this industry originally because I thought money was interesting. As a little kid I didn’t know exactly what I wanted to do, but I knew that I wanted to help people and this is my way to be able to serve and contribute and help people—by being a Certified Financial Planner who serves as your financial guide.

So, what if you find out that your risk number is quite low? In other words, if you look at your stuff and say, “You know what, I’m concerned about inflation, I’m concerned that I’m not earning enough to outpace inflation. Maybe I should have a higher risk number.” Well, “should” is a dangerous word sometimes, because it often comes from other people trying to influence you, people such as friends, family, coworkers, and others. They each have their own risk number. They have their own situation.

Don’t let them influence what you’re doing, because your situation is unique. If that risk number is not something you’re happy with, you might choose to go higher just to understand the tradeoffs, and the tool on our website will show you that there’s a sliding scale to educate you on what happens when you take on additional investment risk as far as return. But there is also downside. You will see what happens when things go down so you can get an expectation on whether you’re willing to live with that.

My bias on all of this is that I want people to make as much money as they can on their investments. That’s a good thing, but within reason, within the level of risk that you’re comfortable with. I want you to get the most bang for your buck. Let’s try to optimize your situation and make sure we’ve thought it through with regard to your portfolio. Use the technology. Use the tool and then we’ll talk to you.

We get a copy of those results, and we’ll talk you through it to make sure that whatever moves you’re making are sound moves for you, and make sense in the long run, not just because of what’s going on right now. Again, ultimately we’re here to guide you, not make your decisions for you. We will give you our opinion and manage your investments in the way that matches that risk number, trying to get you the highest return we can based on that risk number. You are always in control, and you should be.

When people have somebody else take control of all their financial decisions, I think that’s a recipe for disaster because you’re not involved. It’s important you be engaged, at least on a high level, with your financial planning. We talk about this stuff because you’ve got to be prepared for your own future. But also remember that we are still in economic and societal winter—and as is often the case in winter, things seem worse than they are. There’s a lot of risk and uncertainty. There is a lot of crazy stuff happening in the world, and I would say there always is. But during those high uncertainty times and during economic winter, there is also lots of opportunity for those that seek it out and are willing to take on the risk. That means a higher risk number potentially for you, and that might be where you are right now. Maybe you see the potential of taking on additional risk. Or maybe you say, “You know what, I’m fine where I am.” Or maybe, “I’m taking more risks than I’m comfortable with.” We just need to figure that out so we make the adjustments we need to make.

Remember that the night is always followed by the breaking of the day and what always follows winter is spring. I will leave you with that. Again, don’t try to do this alone. Get help from a quality financial planner, which means a fiduciary level independent Certified Financial Planner, and we’ve got a couple of them here. We’re hiring more over time, but Certified Financial Planners are the highest standard in the financial industry.

If you like what you’re hearing on the Wiser Financial Advisor, help us out by clicking subscribe on your favorite podcast service. It also helps us when you share this with friends, coworkers, family. There are a lot of people out there who are financially hurting and really need some guidance. That might not mean that we work with them as a planner right now but passing on our podcast might help them make better choices and guide them to where they need to be. We are here to serve and help you make better decisions about your money.

Have a wonderful week. I hope you are enjoying your family, your friends, and everything going on during this time of year. Merry Christmas and God bless.

This episode has been prepared for informational purposes only and is not intended to provide and should not be relied upon for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors. Investment advisory services offered through Keystone Financial Services, an SEC registered investment advisor.