Advisers must start to seriously consider inflation moving forward according to Lifespan Financial Planning senior investment specialist Brian Long.
In a recent article for ifa, Mr Long wrote that disinflation had persisted for much of the past four decades leading to a favourable investment environment for risk assets.
However, most countries have experienced higher inflation throughout the past year that has seen central banks reverse policy and governments wind back their fiscal deficits.
Markets also no longer see inflation as a transitory issue amid higher wages growth and increased supply pressures.
Mr Long said that most portfolios were constructed during and for disinflationary environments, with portfolio efficiency supported by the generally negative correlation between equities and bonds.
“The concern is that the market is far more fearful when inflation is already high and especially at current stretched valuations, equity/bond correlations may fail to work just when investors need them to,” he wrote.
Advisers need to ensure they have “a robust investment and portfolio construction philosophy, consistently applied, proven through a range of economic cycles, and supported by a decision-making framework that can quickly adjust portfolios” in response to inflation while also understanding the needs and goals of each client.
“Just as there is no silver-bullet portfolio that protects against all inflation scenarios, advisers know that no two clients are alike in preferences and financial situation,” said Mr Long.
For example, clients that are near or in retirement would be particularly sensitive to inflation due to their reduced spending power and increased vulnerability to a sequencing risk event according to Mr Long.
Managing the expectations of clients was also raised as an important issue for advisers to consider with returns likely to become lower and more volatile in the future.
“The risk of structurally higher inflation and a more volatile and lower returning investment and economic environment may be upon us whether we like it or not,” Mr Long wrote.
“This will create an environment where advisers can demonstrate the value of advice and the benefits of robust diversified portfolios backed by a strong governance framework.”
To find out more about how advisers can respond to inflation, click here to read the full article by Brian Long.
Very relevant and thought provoking, especially the longer full version of this analysis. Recent supply shortages and market disruptions already have and will continue to have significant impact on prices which will have massive implications. Just look at the price of petrol.
Yes we’ll, Mr Long did see inflation as transitory but now he doesn’t and wants to tell advisers what they should do. Meanwhile, many of us never drank the transitory inflation koolaide in the first place.