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Navigating Inflation- Cash VS Staying Invested as a Hedge?

Navigating Inflation- Cash VS Staying Invested as a Hedge?

Clear Direction for Your Retirement: Navigating Inflation- Cash VS Staying Invested as a Hedge?

As we sweat out the summer months in the Houston area there’s not much that grabs our attention except focusing on where and when we can get to the next air conditioned envi-ronment. However, I hope that the title of this month’s article was able to grab your attention if only just for a moment. It’s an important concept that not many think about until it’s really too late. 

The most common mantra of financial advisors to their clients is to simply “hold on” to their stock and bond investments when markets correct. The historically accurate but futuris-tically arrogant belief in that statement is that since U.S. markets have always gone up over time they will continue to go up over time. So, just wait it out and suffer through the carnage since it’s only temporary. The problem is no one ever knows if a recovery will take place or how long it will take to do so or even whether said recovery will recoup the entirety of losses suffered. Have we seen the bottom of today’s markets? I don’t know, but do you want to risk it? Do you have a plan? 

Although I cheer for markets to go up indefi-nitely, the simple fact of the matter is that they may not, no one really knows for sure. Market corrections that never fully recover have hap-pened elsewhere in the world and it’s foolhardy to believe it can’t happen to us. Less likely perhaps? Maybe, it has been thus far, but no one knows the future. 

This underscores the importance of risk management. Not just traditional diversification

and static stock and bond percentages based on risk tolerance. I’m talking about risk man-agement that pays greater attention to seeking the management of downside risk dynamically. Doing so by moving between asset classes and sectors that show the probability of better opportunity and even exiting the stock and bond markets to cash if required. If you’re not familiar with this concept (I’ve written about it previously), please call our office and I’m happy to have a conversation with you. 

For example, our models exited bonds around the beginning of the fourth quarter of last year. Why? We watched mathematical indicators that showed us what was beginning to happen in the bond space due to rising interest rates. Furthermore, equity positions have been paired back systematically to cash in varying amounts and timeframes based on our equity time frame indicators and the broader markets deterioration. Bottom line, there’s a strategy in place before markets correct that seeks to manage various risks including draw down of portfolio values. However, is this a good thing? Shouldn’t you just stay invested and ride it out like your advisor says? Keep reading. 

It is a true statement that we want our invest-ments to try to protect us from the long-term effects of inflation. Depending on the person and their financial goals and circumstances they may need some amount of assets invested “at-risk” (stocks, bonds, etc.) to help them meet or beat inflation in the long-term. The issue is that the amount truly needed “at-risk” is different for everyone and most have never been shown what that number is and how it may or may not protect them from disastrous consequences. For example, right now bonds are not the buffer to equity downside everyone thought they would be. If all your money is invested “at-risk” (stock, bonds, etc.) under current market conditions, inflation is eating away at you and you’re losing more and more purchasing power through losses in your portfolio. 

The focus of this article however is whether staying fully invested (“at-risk”) at all times and in all circumstances is better than holding some amount of cash temporarily till storms pass. Furthermore, how does that answer hold when we are in a non-typical inflationary environment that is much higher than the his-torical average? This is precisely where we find ourselves in the current economic landscape. 

Think about this logically for a moment. Is it better to be in some amount of cash temporarily losing to inflation at approximately 8.5% or to be fully invested and down some percentage plus inflation due to today’s volatile equity and bond markets? This is not rocket science, its common sense. Today’s preservation is tomorrow’s production. 

Now typically the first argument against this premise would be since you can’t time the market you shouldn’t ever go to cash. I agree that market timing is futile. However, that’s like saying since I can’t stop a charging rhino with my hands I should just stand there and get run over. You can’t time the markets but you can see trends if you’re willing to look. 

The bottom line…cash has outperformed all comers but volatile commodities over the past year. Sometimes, at the right time and done the right way, cash can be king.   

I hope this is helpful to your retirement journey. Call us, come see us or visit us at www.woottonfinancial.com, we’d love the opportunity to help address your questions and concerns and provide you Clear Direction for Your Retirement®.

Investment Advisory services offered through Game Plan Advisors, Inc., a registered investment advisor. Insurance services offered through Wootton Financial Group, Inc. Game Plan Advisors, Inc. and Wootton Financial Group, Inc. are affiliated through common ownership. Neither Game Plan Advisors, Inc nor Wootton Financial Group, Inc. offer legal or tax advice. Please consult the appro-priate professional regarding your individual circumstance. Not associated with or endorsed by the Social Security Administration or any other government agency.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.
Fixed Annuities are long term insurance contacts and there is a surrender charge imposed generally during the first
5 to 7 years that you own the annuity contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company.
Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. With-drawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty.  Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.

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