Fight Inflation by Hedging Your Retirement Portfolio

The Seesaw Effect of Stocks & Bonds and Yield & Price

With the stock market struggling to break out of this down market, and with bearish experts saying a recession is looming, some clients are seeking fixed income. As investors, we’ve all heard the idiom, stocks & bonds, right? Basic diversification. Remember the seesaw effect: When yields rise, prices fall. Supposedly, the idea is when one goes up, the other goes down, like a seesaw. So, what happened in 2022, when both markets were down? Short answer: Inflation. A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, prices of fixed-rate bonds fall. This is interest rate risk. Misconception that if a bond is a US Gov’t obligation, the bond will not lose value. In fact, the US Gov’t does not guarantee the market value of a bond if you sell the bond before it matures. But, yes, it is complicated. Check out this PBS special.

It’s a bit early to state with certainty that the bear market is over for U.S. stocks (look at what happened just yesterday—1/30/23). With a plethora of issues like record inflation, rising interest rates, the ongoing Ukraine war, along with pending profit downgrades, and added tensions with China, we’re in a tough spot as a world economy. And on top of that, there are some forecasters pegging the probability of a recession at 60%+. However, anecdotally, most investors I’ve talked to have moved on from their dire inflation concerns. But the macroeconomic picture is far from being completely rosy. As a result, more and more investors are hedging by increasing their exposure to safer havens like, U.S. Treasuries, Munis and investment-grade bonds. Amidst the turmoil, these investors are just trying to ride it out, staying patient and in the meantime, collecting some income. In my opinion, not a bad idea. But of course, it all depends on where you stand. If you’re getting closer to retirement, you might want to discuss with your financial advisor an allocation shift to hold some of your retirement monies in a traditional savings or money market account. The good news is that interest rates are up. As a result, you’ll be earning more in interest now than you would have over the last several years.

Make no mistake about it, this inflation thing is real. I recently went to Zippy’s here in Honolulu and simple food for the soul, Oxtail Soup, is $28! I was floored, but still ordered it. Inflation is everywhere and impacts everything we buy. But it is nothing new. I still remember the impact inflationary pressures had on us as a kid growing up on the island of Maui in the mid-seventies. At the time, gas prices were soaring, and supply levels were diving. OPEC decisions made us wait in our cars in long lines for hours at a time just to get fuel for our cars. But we survived and just like we did, keiki today will reflect on what it was like to live in 2022 with the worst inflation to hit our U.S. economy in 40 years. Hopefully inflation has peaked in 2022. For more clarity, many of us are waiting for the Federal Reserve to speak up. Up to this point, Powell & Co. has remained committed to their campaign of interest rate hikes. In fact, it has been the most aggressive since the Carter and Reagan administrations. For now, we’ll see what happens tomorrow when Jay Powell talks to the world. My advice: Take it in stride, one step at a time…gw

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