What are some of the risks that could affect your portfolio? We've been getting this question on a frequent basis! Find out the answer in this week's Arista Advice.
Hello, welcome to Arista Advice! Question of the week and what many people are asking both in the media and online and on the phone with me is: "Paul, what are the risks that could affect my portfolio and especially the inflation risk?"
Every day in the last two to three months we're getting the Producer Price Index, the Consumer Index. Everything is now pointing to higher inflation inside the economic engine of the US economy. Let's talk about some of those risks.
There's three simple answers - rising interest rates, the Fed's policy, and the inflation. The Federal Reserve has already told us that they're going to raise interest rates three times this year. You heard it here first, I believe that the Federal Reserve will have an emergency meeting sometime in 2022 because inflation has grown faster than they'd predicted. I've seen it twice in my career, in my 22 years, where the Federal Reserve has met unannounced and came out with higher interest rates and raised the Fed discount rate, so don't be surprised if it happens.
Let's look at some places to be with your portfolio. Also remember, historically, the best place to be in rising inflationary periods is in the equity market, not all your wealth, but the appropriate amount of wealth, also in financial stocks, and also in real estate. So you all have probably seen an increase of your home value. That's because of inflation.
As you'll see here on this chart, there's a sensitivity of all of the interest groups attached to inflation. If you look over to the far right in the upper quadrant number two, banks, financials and insurance always do well with rising inflation, and also energy, capital goods, transportation, material and consumer durables are also doing good. Where are the places not to be? Well, over on the far left side. It's utilities, food, tobacco, software, commercial and professional services.
This is a tool to just help you understand a discussion. It's not a reference to go jump in and move all your money to one sector over another sector. But always remember, before you make any adjustment to call and speak with your financial fiduciary advisor. Also, stay invested over the long-run, and always remember to take the long view in all things. Avoid the common mistakes of trying to time the market.
Today a wonderful educated client said, "Hey Paul, I think the market's going to go down. Let's get out!" and I said, "No, no, no, no you don't know when it's going to go down. You don't know how long it's going to go down. You don't know how deep it's going to go down, and you don't know when it's going to go back up, so always stay invested." Always stay invested, and when in doubt, always stay invested because the market always surprises.
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