Ask an advisor: If inflation keeps falling, how should I change my investments?

Ask an advisor: If inflation keeps falling, how should I invest?

November 15, 2023 5:41 PM

From the spring of 2022 to the fall of 2023, inflation has decreased significantly.

Welcome back to "Ask an Advisor," the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

For the past three years, inflation has been a difficult fact of American life. In 2021, as the economy recovered from the pandemic recession, rising prices began picking up speed and then suddenly skyrocketed. In June 2022, the consumer price index (CPI) jumped at a yearly rate of 9.1% — a level not seen since the early 1980s.

For investors, the cure has in some ways been worse than the illness. To get inflation under control, the Federal Reserve has raised interest rates 11 times since March 2022, battering an already wobbly stock market.

Fortunately, the medicine appears to be working. By June 2023, the rise in the CPI had sunk to 3%. Then it ticked back up to 3.7% in August and September, raising fears of another upward spiral. But on Tuesday, the Bureau of Labor Statistics released some good news: The rate settled back down to 3.2% in October.

So at least for now, inflation seems to be on a downward, if uneven, trajectory. The question for investors is, how should they react — or should they?

As we do every so often at "Ask an Advisor," this week's question comes from yours truly, retirement reporter Nathan Place. As inflation cools, I'm wondering how average investors like myself can use this trend to our advantage. Here's what I wrote:

Dear advisors,

It's been a long, tough road, but the Fed seems to be slowly winning its battle against inflation. How should investors adjust?

In particular, I'm wondering what to change about my own investments — or if I should stay the course. Are there assets I should allocate more to, because they'll benefit from lower inflation? And on the other hand, what assets will be negatively affected?

In terms of my own portfolio, I have both a 401(k) and a Roth IRA, and my wife and I have an investment account with Schwab. That account is invested 50% in the S&P 500, 30% in foreign stocks and 20% in bonds. If inflation continues to cool, is there anything you'd recommend changing about that ratio? Or should I leave it alone?

Thanks for your help!

Sincerely,

Inquiring in Inwood

And here's what financial advisors wrote back:

Don't rock the boat

Shannon Fleener, certified financial planner and founder of

Sage Financial Planning

in San Diego

Inflation is certainly an important factor in financial planning, especially when considering goals such as buying a home, refinancing, funding other goals with interest-bearing loans, or managing current debt liabilities.

As for investment planning, while inflation certainly plays a part, I'd emphasize the much more important factor: asset allocation. When a portfolio is appropriately allocated, it is already prepared to ebb and flow with changes in the macro environment without negatively impacting long-term returns. And just a reminder: Long-term returns are what we focus on. Investing for short-term returns is just glorified gambling!

Meet with your advisor at the appropriate interval to ensure your asset allocation is appropriate for your individual needs as an investor, and then just stay the course.

Think long-term

Jay Zigmont, CFP and founder of

Childfree Wealth

in Water Valley, Mississippi

If you believe in long-term, passive investing, as I do, then day-to-day inflation does not matter much. For your portfolio, if your allocation has worked for you in the past, there is probably little reason to change it. Resist the urge to tinker.

In the bigger picture, people who have a considerable amount of money in high-yield savings or treasuries may want to be working on a plan to move their money into the stock market, but that timing can be hard.

Consider tech stocks

Noah Damsky, chartered financial analyst and principal at

Marina Wealth Advisors

in Los Angeles

First of all, staying the course is almost always the best option — as long as the course you're on isn't a bad one, and the one you're on doesn't sound bad. It's hard to say what's best for you since we don't know anything about your financial situation, but for folks younger than 40 who are able to take more risk, perhaps they would benefit by holding less than 20% bonds.

If you want to fine-tune your portfolio for changes in the economy, these are some areas to look at:

We expect growth stocks and technology to do better than value stocks as rates decline amid lower inflation. Value stocks such as financials would be an area that might have declining expectations.
Defensive stocks that are hurt by higher interest rates — think utilities — could benefit as interest rates and inflation decline.
Private equity is an area we will continue to look at for qualified clients as long-term tailwinds for the industry are still in place.

Winners and losers

Nicholas Bunio, CFP at

Retirement Wealth Advisors

in Downingtown, Pennsylvania

Without knowing too much more about you and your wife, your investments total 80% in stocks and 20% in bonds. And that's pretty aggressive, since 50% is in the S&P 500 and 30% is in foreign stocks.

If we see much lower inflation from here on out, I would say both stocks and bonds will do well. Stocks like low rates and inflation, and bonds (especially bond funds) move inversely to interest rates.

Of course, it's more than likely commodities, and assets related to commodities, would suffer. With inflation falling, commodities in general would probably see a fall in price, hurting the farmers, miners, drillers, equipment makers and others involved in these businesses.

On a side note, inflation can change quickly if there's a war, natural disaster, etc. Just look at early 2008; suddenly oil hit almost $150 a barrel and inflation spiked over 4%. We can't predict the future, so next year inflation could be negative or suddenly increase again.