Since 2019, the Consumer Price Index (CPI) has experienced significant changes across various everyday categories: housing prices have increased by 29.3%, food and beverages have risen by a similar margin, commodities have risen by 20.5%, and medical care costs have increased by 16.6%. These numbers can be alarming. You have likely also noticed the same trend if you have reviewed your own bank statements.
Life definitely is more expensive now than it was a few years ago. Boomers often bought homes in their 30s on a single income, raised multiple kids, and still managed to retire comfortably.
Can the same be said today?
It is possible, yes, but undeniably more challenging because of the inflationary pressures of our time. And yet, even as times change, the fundamental needs of people remain the same. Buying a home, raising children, funding their education, covering everyday expenses, and saving for retirement are still top priorities.
The question is, how can you achieve these goals?
The answer lies in knowing how to prepare for inflation, and that is where a financial advisor steps in. They can help you plan, invest strategically, and protect your wealth. Let’s explore how.
How can a financial advisor help you prepare for inflation?
1. By helping you understand what inflation is, how it works, and why it is an essential factor to consider in financial planning
How can you prepare for something you do not fully understand?
So, the first job of a financial advisor is to help you understand what inflation is and how it works. Inflation is just the rise in prices over time. It affects every corner of your life, including your groceries, the gas you put in your car, the healthcare bills you pay, and even your morning coffee.
In the U.S., there are a couple of ways economists track inflation. One is the Consumer Price Index (CPI). That is essentially a basket of everyday goods and services, and the government compares the current cost of that basket to its previous cost.
Another measure is the Personal Consumption Expenditures index (PCE), which is actually the Federal Reserve’s favorite tool because it covers a broader range of spending habits. A financial advisor can help you understand these indices.
People often think inflation is always bad. But that is not true. A moderate level of inflation is actually beneficial for the economy. When prices rise slowly, it encourages people to spend today rather than hoard their cash. This drives businesses and creates jobs. If there is no inflation, or worse, deflation, the economy can suffer. A financial advisor can help you understand what really causes inflation.
Inflation is caused by supply and demand. If too many people are chasing too few goods, prices tend to rise. Additionally, labor shortages and rising wages can also significantly impact inflation, just as government policies.
A financial advisor can also help you understand that inflation is not exactly something you can predict. It moves in cycles. Sometimes it cools off, and sometimes it heats up; while experts make their best guesses, no one has a crystal ball. What everyone knows is that over the long run, inflation tends to trend upward. Therefore, regardless of the circumstances, your money will lose its purchasing power if you do not plan ahead.
A financial advisor can explain the actual impact of inflation. For instance, if your portfolio is bringing in a 6% return, it might sound like you are building wealth. But if inflation is running at 3%, your actual purchasing power is only growing by 3%.
Financial advisors can help you prepare for hyperinflation, deflation, or the average inflation in the country. They can teach you not to react every time prices rise. They can walk you through how inflation impacts your savings, your investments, and even your retirement plans, and talk about ways to diversify so that your money does not slowly erode in value. At the end of the day, inflation is not something to panic about—but it is something you need to prepare for.
2. By recommending that you invest in inflation-fighting investments like stocks
A financial advisor can recommend the best investments to fight inflation. If you want to beat inflation, you will likely need to accept a higher level of risk in exchange for better potential returns. This can be done by investing in stocks. Stocks carry a higher risk but also offer the potential for higher rewards. Over the long term, stocks have historically outpaced inflation, although they can be volatile in the short term. This makes them a crucial tool in an inflation-fighting investment strategy, particularly when combined with proper diversification and risk management.
One common approach is to look for companies with strong pricing power. These are those that can pass on rising costs to their customers without hurting demand. While this may result in higher prices for consumers, it enables companies to maintain profitability, which in turn supports their stock prices. A financial advisor can help you select suitable stocks, such as companies that are likely to hold steady in the face of inflation. These may include stocks from healthcare, consumer goods, and other sectors, which are relatively unaffected and continue to be in demand even if people lose their purchasing power.
3. By focusing on diversification just as much
One of the most important steps you can take to prepare for inflation is to ensure your portfolio is well-diversified. Diversification is the best defense you have when inflation makes the markets unpredictable.
Now you can invest in stocks, the inflation-beating tool that everyone talks about. However, investing in stocks alone may not be enough. When interest rates rise in tandem with inflation, certain types of stocks, particularly growth stocks, tend to struggle. Borrowing becomes more expensive, which puts pressure on companies. This does not mean you should avoid stocks altogether. Equities can still help your money grow faster than inflation, but you need to diversify your investments.
A diversified portfolio helps balance out the ups and downs, allowing you to maintain your purchasing power. You can do this easily with index funds or Exchange-Traded Funds (ETFs) alongside stocks. These provide exposure to multiple U.S. companies, all tied together. This, in turn, can mitigate the impact if one sector is hit harder by inflation than another. Plus, some ETFs are specifically designed to perform better when interest rates rise, which can give your portfolio an extra layer of protection.
You can also add fixed-income assets to your portfolio mix. At first glance, bonds and inflation may not seem like a good match. After all, when inflation is high, the purchasing power of fixed interest payments falls. However, not all bonds function in the same way. Treasury Inflation-Protected Securities (TIPS) are explicitly designed for this situation. With TIPS, the principal adjusts upward with inflation, and interest payments rise too. TIPS can also be helpful if the economy hits a patch of deflation. With TIPS, you get back at least your initial investment, never less. However, TIPS usually offer lower yields compared to regular bonds. Even then, they offer inflation protection, making them worth considering.
Shorter-duration bonds are another option. They tend to be less sensitive to rising interest rates, which makes them a safer choice when inflation is heating up. Certificates of Deposit (CDs) can also provide a relatively stable return, although you will want to ensure the rate is high enough.
You can also look beyond the U.S. for opportunities. Inflation does not hit every country in the same way or at the same time. Investing internationally allows you to tap into economies that may be experiencing lower inflation rates than the U.S.
4. By asking you to explore alternatives to cash
A financial advisor can help you understand why holding too much of your wealth in cash can be risky. While it may feel safe, inflation gradually erodes the value of your savings. If you have $10,000 in the bank today, it would probably not hold the same weight as it does now 20 years from today.
On the other hand, investing your wealth over the long term can give you a better chance of growth that outpaces inflation. While investments do come with risk, history shows that they typically deliver more substantial returns than cash savings. Bank interest rates are usually too low to keep up with inflation. Keeping large amounts of money idle in your savings accounts could result in losses in the long run.
That is why financial advisors will always encourage you to explore alternatives beyond cash. These may include stocks, bonds, index funds, ETFs, and other types of investment vehicles.
5. By asking you to delay Social Security benefits if you are retired
Inflation can hit retirees the hardest. The gap between your income and expenses can widen very quickly. Delaying your Social Security benefits can be a helpful way to deal with this.
A lesser-known advantage of Social Security benefits that you may not know about is that they get Annual Cost-of-Living Adjustments (COLA). The higher your check, the larger your COLA increase will be each year.
Now, how do you maximize your check?
Here’s how:
If you can wait until at least your full retirement age, which typically falls between 66 and 67, depending on when you were born, or ideally until age 70, you will receive a higher monthly benefit from the Social Security Administration.
In fact, Social Security increases your check for every month you delay claiming beyond your full retirement age.These boosts can be a hedge against inflation.
If you are wondering how to prepare for inflation at home without taking any action, delaying Social Security could be one of the smartest moves to make. Every month you delay past your full retirement age, your benefit grows. Unlike most investments that carry risk, this increase is locked in. And because Social Security also includes COLA, those higher benefits keep rising along with inflation.
Of course, delaying Social Security may not always be possible. Many people rely on it for various purposes. And if you fall in that category, you can start claiming your benefits. But if you can afford to delay them, go ahead and do it. You can discuss your options with your financial advisor.
6. By asking you to invest in precious metals like gold
Investors who fear rising inflation can invest in gold. Gold is not just eternal in the fashion world or sparkling in Cartier and Tiffany’s showcases. It is also a timeless element in your investment portfolio.
To start, it serves as a hedge against inflation. Historically, gold tends to move inversely to the stock market. So, it adds diversification to your portfolio, which comes in handy when managing inflation and overall risk. And since gold is a commodity, its price often rises when inflation does, making it a natural hedge against rising costs.
When investing in gold, you do not have to limit yourself to jewelry. You can invest in gold in multiple ways, such as buying physical gold coins, opting for mutual funds or ETFs that track gold prices, or even exploring futures and options in the commodities market if you are more seasoned.
Whether you choose a gold bracelet for yourself or a gold-backed ETF for your portfolio, the idea is the same. A financial advisor can guide you through the options and help match them with your risk appetite and investment style.
Final points to consider
An inflation-fighting portfolio is a must for everyone. And a financial advisor can be the perfect mentor when you are building one. So, discuss with your advisor strategies that can help protect your money from inflation, evaluate all possible options, and take a proactive approach rather than waiting for inflation to erode your savings. If you don't already have a financial advisor, you can connect with one through our free advisor match tool.