As we close this year, we’ve experienced real inflation pricing for the first time in 30 plus years. Building supplies, food, energy, clothing, and just about anything else you can think of has gone up significantly in price this year. Part of this is due to the supply chain issues we are seeing. When many items have long backlog times and are not readily available, more people are willing to pay more for the same item. This puts pressure on prices, which adds to rising inflation.
Inflation also typically results in rising interest rates. We are currently near all-time lows for interest rates. The Federal Reserve has indicated they will start to taper their bond-buying activities which will likely mean that interest rates are going to be higher in the coming years. Here is the link to a helpful video produced by the Wall Street Journal that explains tapering and why it makes financial markets volatile.
Many financial professionals will tell you that one answer to the inflation question is to remain invested, even in volatile times. While there is some truth to this, the smart investor recognizes the inherent risks in following this doctrine. Remaining static in times of volatility is kind of like standing in the street watching a bus come right at you. Financial markets are constantly changing and therefore it is important to be able to change with them.
Passive investing is often defined as a “buy and hold” strategy. The risk is that when the financial markets move in violent and drastic ways, many investors tend to incur large losses that may require years to get back to where they started before a decline. Passive investing also keeps your money in weaker assets as they become riskier, limiting your ability to grow even when the market improves.
Active investment management, as we practice the discipline, seeks first and foremost to avoid life-changing financial loss. We move out of assets when they stop working for us. We also look to achieve growth when we see signs of strength. We at Shadowridge believe that one answer to these difficult financial times is to be “active” in reducing the risk of loss. It also means we seek opportunities to generate real rates of return that help maintain and increase our standard of living over the years.
No investment discipline works perfectly every day. Financial markets can never be accused of being rational, but therein lies the opportunity. Being able to seize those opportunities, rather than being a victim of market volatility, can differentiate a successful investment strategy from a poor one. We help clients achieve long-term progress to financial strength, most especially in the difficult times we may face in the coming years.
I hope you and your family have a happy holiday and a prosperous 2022.