More Inflation? | Brandon Averill, Justin Dyer | AWM Insights #29

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Episode Notes

Last week, we discussed the Federal Reserve’s recent meetings where they signaled a willingness to allow a rise in inflation over the next 10-20 years. We received a lot of good feedback and follow up questions, and as a result are following up in a part two this week where we can address a few of the implications for investors.

Our managing partner, Brandon Averill, is joined again by our Chief Investment Officer, Justin Dyer to discuss:

·       With the Fed signaling that they would likely allow inflation to rise over the next 10-20 years, are we as investors happy about that?

·       Would a higher than normal rise in inflation impact our investment strategies for our clients? Would it dictate a change in our portfolios?

·       Could inflation change investment performance over time? Are there ways to protect or adjust for that?

·       Are there any adjustments that are needed to allow for inflation

·       What are Treasury Inflation-Protected Securities (TIPS)?

+ Read the Transcript

Brandon Averill (00:00):
Welcome back to AWM Insights, which is a quick hit each week on a timely investment topic to help you maximize your net worth. As you know, I'm Brandon Averill, a partner with AWM Capital, and I'm joined again by AWM CIO, Justin Dyer. We got a lot of questions in the last week, Justin. Our topic of inflation, we thought was real nerdy, turned out to be a really good one and we got a lot of questions around it. I'm excited to jump in this week, clarify some of those questions. We made some statements around inflation last week and it definitely is a confusing topic, so we want to lay it out so everybody understands where we're coming from.

Justin Dyer (00:35):
Yeah, and we'll wrap it up with the topic this week. Hopefully we don't overdo it. But one of the main questions that came in, or the themes rather, was, we said inflation would likely be higher over the next 10 to 20 years based on what the Federal Reserve has been telegraphing out there in the markets and changing within their policy framework and whether we were happy about that.

Justin Dyer (00:57):
We don't predict the future and can't really say that will actually happen, but as we also mentioned, some level of inflation is definitely healthy for the economy or a signifier of a healthy economy. We don't want to see it to go too high, but a level of inflation higher than what we've seen, say over the last 10 to even 20 years, would be probably a good thing for the economy as a whole. Are we happy about it, if that actually happens? Probably. We'd also don't want it to see it go too high as a result.

Brandon Averill (01:30):
Yeah, that makes sense, Just. And I think the other thing, right, is from an investment standpoint though. This input, this inflation input, is going to change how we plan for clients. And one of the questions that came through was, what are you going to do? Are we changing our portfolios? Of course we're not going to change our portfolios. We know that having a plan and sticking to it is the way to go. We can't predict the future. We can't time these things. We don't even know when inflation might show up.

Brandon Averill (01:59):
It'd be foolish to go in and start altering portfolios. However, we do have to have a good understanding that this might mute some investment performance over time. And really where it changes from a planning perspective, and I think it really highlights for us the way that we go about planning for our clients, because, we're putting those protective reserves into place based upon inflation, make sure that we have really safe investments that are going to provide for those needs that are in the short term or even in the future that are those basic necessities.

Brandon Averill (02:33):
And we have to adjust for inflation there. And we use special vehicles to do that obviously, but really making the broad statement that we're going to predict inflation going up and the Fed is going to allow this thing to run hot and we're going to change things, to me, it still doesn't necessitate a change in the portfolios.

Justin Dyer (02:51):
Yeah, it's an interesting conversation for sure. But to your point, it doesn't necessitate a change and it's important to underscore that we build our portfolios to withstand various market environments, including those where inflation may be a little bit higher than what we've seen in the past. As an example, we have exposure to what are called treasury inflation protected securities, for the most part, across portfolios. We also generally favor the value oriented side of the market, which tends to do well when compared to growth stocks within an inflation environment. The portfolios, again, are designed to withstand many different environments, but specifically to inflation, we have areas of the portfolio that definitely respond positively should inflation tick up here.

Brandon Averill (03:37):
That's great to know. Yeah, I think just a reminder for everybody, hopefully to simplify it a little bit, is that inflation could come, deflation could come. We're going to protect that part of your portfolio. That is obviously the area that you need for your immediate needs, your short term needs or your longterm, just basic necessities. And we're going to protect that with inflation protected securities and bonds and vehicles of the sort, and not to jump too much to conclusions, and we're not going to try to predict things for you, but we're going to take the same planned, measured approach that we typically take.

Brandon Averill (04:15):
With that, we're going to wrap today's show up. Again, we thank you so much for listening to AWM Insights. Our production team got on me because I can't say www, so if you want to listen to more go to AWMInsights.com. You can subscribe to our newsletter and certainly grab more information there. And then additionally, as you know, if you enjoyed this podcast, it would be hugely helpful for you to go over to wherever you're listening at this episode, leave a review for us, helps everybody else find us, get this information out there. And with that, we'll see you next time on AWM Insights. And we'll close with, as always, stay humble, stay hungry and always be a pro.