- Understanding Your Client’s Needs
- Create a Cash Management Strategy
- Hedging Inflation Risk
- Withstanding Inflation
Understanding how inflation affects clients’ financial goals is perhaps the most crucial conversation you can have with them. It will help you better understand how to help them. create a cash management plan, as well as consider assets that can help them hedge inflation risk. The continued rise in prices may have many of your clients wondering if there is more that they can do to better position themselves for prolonged inflation.
Understanding Your Client’s Needs
Although inflation is a natural phenomenon that occurs when prices rise due to increases in demand for products, it can be a source of concern for investors. After all, rising prices reduce the purchasing power of money, and most investors aim to increase their incomes in the long run. Inflation has many negative effects on stocks and bonds, and can even interfere with retirement plans. Many people had hoped that the inflation spike that started in autumn 2021 would disappear within a few weeks (once holiday demand has cooled and COVID-related supply chains issues were resolved), but it has persisted much longer than anticipated.
Often, inflation is characterized as a negative factor, but price changes are a natural part of life. Inflation becomes financially significant when they occur at an unusually high rate and are widespread. Advisors can assist clients in calculating their own personal inflation rate. Understanding how inflation affects each client is a good place to start.
Create a Cash Management Strategy
Inflation is one of the most pressing concerns for businesses today. Small businesses are already feeling the pinch. Inflation has led to price increases for more small businesses, this year, than in any other year since 1974. As a result, many of them are scrambling to cut costs and stay liquid. Help your clients reduce the inflation impact by creating a cash management strategy. This is a way to know how much cash they should keep and where to keep it. With interest rates so low, excess cash will almost always decrease in value against inflation, even if the latter falls back to pre-2021 levels.
Now more than ever, It is essential for business owners to keep an eye on economic trends. The Consumer Price Index (CPI) rose 6.8% in the 12-month period ending in November of this year, marking the largest increase in almost four decades. Meanwhile, pandemic-related business shutdowns and vaccine rollouts have contributed to high customer demand, which has led to a steep increase in the prices of goods and services.
While the U.S. Consumer Price Index reflects inflation rates across the country, your client’s personal inflation rate may differ. One of the most common questions clients ask their financial advisors about inflation is whether their life plan will be affected by higher prices. Inflation can make it necessary to increase spending to maintain the same lifestyle. They may worry about the impact of higher prices on their retirement savings, which could be a critical part of their financial planning. As inflation continues to rise, financial advisors must adjust their advice accordingly. As inflation rises, you must adjust your lifestyle to keep up.
Hedging Inflation Risk
Inflation-hedged investments are beneficial additions to portfolios during times of high-inflation, but investors must also consider other factors. For example, some assets have already increased in value due to heightened demand and may be less effective inflation hedges during inflationary periods. This conversation could begin with U.S. stocks that have outperformed inflation over long periods of time.
Real assets such as government bonds and mortgages are often considered safe havens for US dollar holders. Although they tend to have lower liquidity and a lower cash flow profile than other types of investments, real estate is an excellent inflation hedge during high-inflation periods. Even though the returns on these assets are generally less than those offered by equities, investors are compensated with higher prospective returns. There are other assets that can be used for hedging inflation risk such as REITs, gold and commodities.
Although advisors may encourage clients to keep their feet on the ground and not make rash decisions, there is still a way that advisors can help clients better position their finances to weather the current inflation spike and improve their long-term financial situation without having to alter their plans. If you’re worried about rising inflation costs, you may want to consider these strategies. Although they are not mutually exclusive, they are all possible. While there is no perfect strategy, most companies have already considered some or all of them.
For investors, this may mean buying companies that can weather inflation. For example, you could invest in materials or energy companies that are expected to grow faster than other sectors. These sectors are believed to remain profitable and offer relatively attractive valuations. In addition to the benefits of higher profits, you’ll also benefit from the cyclicality of the economy. And since many companies will have to adjust their business models to cope with inflation, buying a stock in a growth company that’s positioned for continued growth may be the best option, although advisors may encourage clients to keep their feet on the ground and not make rash decisions.
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