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Inflation: Another Reason to Stay Invested and Stick to your Long-Term Financial Plan

We are now approximately 16 months beyond our country’s deepest and fastest recession since the 1930s. The S&P 500 is currently hovering around 4200 since bottoming out at 2237 on March 23, 2020 (an 85% increase), real estate is booming, 54% of the US population age 18+ is fully vaccinated, and California (a holdout and our most populous state) is starting to phase out its coronavirus restrictions.


In the midst of all this positivity, recent news headlines blared that inflation jumped 5% from May 2020 (its largest 12 month increase since August 2008) following a 4.2% increase in April.  As our readers likely know firsthand, prices for goods and services such as used cars, furniture, appliances, airfares, and rental cars have all increased since May 2020, in some cases dramatically.

Our first quarter 2020 client letter highlighted the basics of inflation, as a refresher: inflation occurs when the price of goods and services increases over time resulting in a decrease in purchasing power, or value of money, as the years go by. 

The consumer price index (often referred to as CPI) is the U.S. Bureau of Labor Statistics’ calculation that monitors the average change of prices in eight categories: food, housing, apparel, medical care, recreation, transportation, education and communication, and other goods and services. 

Today’s inflation rates are likely the result of three things: what is termed a base effect, supply issues, and households raring to spend their cash on hand (thanks to multiple stimulus checks and months of staying at home).

  • The base effect means that comparisons to one year ago are magnified because pandemic-induced shutdowns depressed the cost of goods and services 12 months ago.

  • Supply issues are popping up as the global economy recovers from shutdowns. Businesses are navigating a perfect storm of decreased production and coronavirus labor shortages, which was quickly followed by a need to speed up production and hire workers as demand increased.

  • Finally, household savings rates that spiked throughout the coronavirus pandemic are now fueling increased consumer spending (and increasing demand for) goods and services that had been foregone for months. Retail and food sales alone have increased 28% since May 2020.


So, what does this all mean?

Well, the central question is whether price increases are temporary and will fade as the economy reopens and supply catches up with demand (and demand evens out), or whether price increases continue and require swifter action by the Federal Reserve. Already this week, the Federal Reserve signaled a plan to raise interest rates in late 2023, instead of beyond 2023 as originally planned.

In the meantime, we, your Charter Oak advisors, are here to remind you how important it is to stay invested and stick to your long-term goals-based financial plan no matter what the answer is. 

Maintaining purchasing power over the long-term is a key reason for investing in stocks, as detailed in our clients’ Investment Policy Statements. To put things in perspective, the average annual compound returns of the S&P 500 is around 10% going back to 1926 and the consumer price index has averaged just over 3% since 1914. This means the investor who is comfortable sticking with a portfolio tipping toward stocks is likely to see future portfolio growth that at least keeps pace with inflation. 

Inflation assumptions are also baked into each of our clients’ Financial Plans. We model inflating costs for living expenses, health care, travel and other important personal goals to project whether a client is expected to fund these goals assuming savings rates and projected average investment growth. 

While there is always room for error, our portfolios and financial plans are built on sound historical data to make our best predictions for what is likely to happen in the future. And by updating our clients’ Financial Plans at least annually, we are proactive in recommending changes to goals as time goes on (spending more/less, keeping/selling assets). 

Remember, all it takes to be a successful long-term investor is to simply stay invested in a strategy that maximizes how well you sleep at night, to paraphrase Morgan Housel’s 2020 book, The Psychology of Money (a book your advisor has read and highly recommends for summer vacation, but we digress). 

We want to take this opportunity to send our warm wishes as our (fingers crossed) post-Covid summer 2021 officially begins this Sunday and as many of you celebrate Father’s Day with loved ones or by remembering loved ones who have passed.