Can you protect your wealth from inflation?

Inflation as a New Concern

In big historical terms, inflation is a relatively new concern. In the 17th century, the Spanish Empire collapsed without even realizing the main cause of its problems was inflation. Over time,  a number of countries have fallen victim and imploded due to extreme levels of inflation with one notable example being Germany. At the peak of its hyperinflation crisis in 1923, the country saw daily inflation rates as high as 20.9% which meant it took approximately 3.7 days for prices to double(If only you could double your money every 3.7 days… one can only dream!).  With inflation being a topic of concern in many Canadian households and the cost of goods rising at a faster rate than your employment income, should you be concerned, and if so how should you position yourself to protect your wealth?

Statistics Canada recently reported that the February 2022 Consumer Price Index (CPI) came in at 30 year high of 5.7%. In case you are wondering what CPI means, it is a metric used to measure the change in the price of goods from one period to another. The February 2022 CPI number of 5.7% means that a basket of goods that cost $1 in February 2021 now costs $1.05. A $0.05 increase on a dollar may not seem like much but if you account for all your monthly expenses such as rent, gas, food and tuition, it can really add up to a huge dent in your wallet.

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With that being said, I thought it might be worthwhile to add some context on where Canada’s February inflation number stands from a global perspective.  

Source: https://tradingeconomics.com/country-list/inflation-rate-

Getting Ahead of Inflation

Pre-Retirement

There isn’t a 100% guaranteed way to preserve your wealth and get ahead of inflation. Concerns around rising inflation are somewhat different depending on the person’s age and stage of life. Depending on how much income you are earning on a monthly basis, higher-income earners tend to have more room in their budgets to absorb price increases. On the other hand, price increases in basics like food, energy, and medical care take a bigger bite out of the budgets of lower-income earners. If you are in your employment years, one of the more conventional ways to get ahead of inflation and keep up with your standard of living is to ask for a raise. This might not always work out in your favor, but if it does, you get to counter the effects of inflation without having to drastically adjust your spending habits or look for a second/new job.

Your main priority during your working years is to accumulate wealth and pursue your goals. Knowing how different investment assets perform in an inflationary environment can go a long way in structuring an ideal asset allocation that’s unique to you. Working with an advisor can ensure that your investments are more resistant to inflation. An example of one thing to consider is, if a significant amount of your portfolio is in Fixed Income, your investments will drop dramatically if inflation is higher.

Retirement

If you happen to be in the retirement stage of your life, you are mainly focused on protecting and conserving your wealth. Inflation happens to be one of the biggest threats retirees face with regards to their savings and being able to sustain their income needs. One of the most important things to consider during this stage of your life is that spending usually starts high, drops off, and gets high again in your later years where most of your retirement income is directed towards healthcare. During retirement, working with a Financial Planner allows you to forecast multiple ‘What-if Scenarios’ that allow you to account for how rising inflating may affect your ability to withdraw from your investments. Having a plan gives you a feeling of confidence that all contingencies have been planned for and this ultimately allows you to make informed decisions about your financial wellbeing.  

For many Canadians, rising inflation comes with rising uncertainty. If you happen to be investing in the financial markets, it is easy to feel compelled to react to negative headlines like ‘Inflation hits new 30-year high’ and second guess your investment strategies. It’s during times like this that tuning out all the noise goes a long way in preserving your wealth. One thing to consider is that markets always require context, and it can be extremely hard to hedge against short-term risks. Working with a planning professional allows you to make a clear assessment of the current economic landscape and that in turn allows you to structure your investments in a way that protects you from inflation risk.

- Kondwelani Kalinda, Financial Planning Assistant

Kondwelani Kalinda is a Financial Planning Assistant at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Kondwelani Kalinda who is a Financial Planning Assistant for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.