Recently, Canada’s inflation rate climbed to a 30-year high. While that affects our cost of living with goods and services getting pricier, rising inflation also impacts our investments. The good news is that inflation is already one of the potential investment risks that money managers and advisors monitor and respond to, as needed.
Impact on investments
Generally, an inflationary environment affects fixed-income investments more than equities. Rising inflation that leads to increased interest rates can negatively impact bond yields, particularly longer-term bonds. So, money managers will often move toward shorter-term bonds to manage risk. Conservative investors who focus heavily on fixed income may require portfolio changes or increased savings to keep their financial objectives on track.
In equities, certain sectors typically perform well when inflation is higher, which may include energy, financial services and commodities. These sectors could be overweighted by money managers or may already be held in a fully diversified portfolio.
Keeping your wealth plan on track
When we project how much you need for retirement and help you determine when you can retire, we account for an inflationary impact. One element of the calculation typically involves an estimate of your required annual retirement income. That estimate begins with an amount in today’s dollars, which we convert to a higher amount based on the number of years to retirement and an annual assumed inflation rate. Your financial objective is always based on the dollar’s purchasing power at the time you need it. We can run different inflation rates and discuss building an inflation cushion to protect against a higher-than-expected rate.
Economists are divided as to whether higher inflation will be temporary or ongoing. However long it lasts, connect with us to discuss how your wealth plan is positioned to manage the impact of inflation.