Inflation is at its highest point in decades, and interest rates are on the rise. For many investors this type of environment is unknown after years of low rates and stable prices, creating multiple questions for physicians tending to their investment portfolios.
Doctors close to retirement may wonder what impact this economic volatility will have on their investments and how it will affect their timeline for hanging up their stethoscopes. Younger physicians are grappling with student loan payments and rising prices for almost everything and may be wondering where to put their money.
These are all valid concerns. “Not only does inflation erode purchasing power, it can have a detrimental impact on an investment portfolio,” says Michael Joyce, C.F.A., C.F.P., president of Agili, a financial planning and investment management firm. “If inflation increases, interest rates will also increase; bond prices will fall when interest rates rise. But there will also be a negative impact on stock and real estate values. As interest rates rise due to inflation, the stock market will be discounting future earnings with a higher discount rate, which means lower values.”
Investors have to be cautious to consider all factors affecting their portfolio. “Sure, an investor might see a return of 7% on their portfolio in a given year. However, what if inflation for the same year was measured by the Consumer Price Index at 9%?” says Jeff Pratt, CRC, a financial advisor with Finity Group, which specializes in financial planning for medical professionals.“On paper that’s a real return loss of 2% since the portfolio growth didn’t keep pace with inflation for the same year.”
If inflation rises to the point where consumers shift from being unhappy about paying more to not buying products, this could have even bigger economic consequences. “Inflation can only outpace wage growth for so long before consumer spending is negatively impacted, and drop-off in consumer spending could in turn lead to an economic slowdown,” says Pratt.
Clear goals help protect your investments
Physicians who are close to retirement have reason to be more worried about their investments as inflation rises because they have a shorter timeline to weather an economic storm and recover any losses. They might be tempted to make sudden changes to their portfolio, but experts say this isn’t always the best strategy.
“Regardless of whether it’s inflation or any other factor, investors should remain focused on their long-term goals and be cognizant of not taking on risk — or too much risk at the very least — they can’t handle,” says Pratt.
If, for example, a physician is nearing retirement with a $5 million portfolio and anticipates only needing $100,000 annually to meet their lifestyle needs due to other income sources, this person may not need any adjustment, says Pratt. But if the lifestyle needs require $500,000 a year, that is a faster draw down and will have a much larger impact on the portfolio, possibly requiring some assets to be repositioned. On the other hand, if they have a short life expectancy with no goal of leaving wealth to heirs or charities, this may not matter.
Investment strategies need to match overall goals and not just be knee-jerk reactions to changes in the economy.
“Diversification is the key,” says Joyce. “Physicians should include investments in their portfolios that will perform relatively well in a rising inflation environment.”
And if a lot of time was spent planning investments early on, there is one key move to keep in mind. “Assuming they were invested appropriately for retirement, the best move is likely no move at all,” says W. Ben Utley, CFP, president and a primary advisor at Physician Family Financial Advisors, a firm exclusively serving physicians.
If moves are required, Joyce says investors should look at options such as inflation-protected bonds, commodities, short-term bonds (which are less interest rate sensitive), stocks that pay high dividends and real estate that generates a lot of cash flow.
One option is Government Series I Savings Bonds. These can be purchased at Treasurydirect.com, but there’s a limit of $15,000 per calendar year. However, they are exempt from state income tax.
“Once an I bond is purchased, the money must be left in the bond for at least a year,” says Pratt. “Also, if cashed out in less than five years, then the previous three months of accrued interest is forfeited. Because of this, Series I bonds are most likely to be considered by folks with cash needs between one and five years out.”
Each inflationary environment is driven by different factors, so there is no one-stop shop to inflation-proof a portfolio, notes Pratt. Lower-duration bonds, which…
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