What do you do with your portfolio when inflation is soaring?
There are a few things you can do to preserve your wealth in these times: Be patient. Don’t panic. Consider your time horizon
It’s normal to feel panic when prices are galloping, the markets are in disarray, and your investment portfolio is in dire need of resuscitation.
For Don Carlo P. Hernandez, Metrobank’s Portfolio Strategy and Advisory Division Head, it is best to quell that panic first and make a little effort to understand what’s happening.
How inflation affects portfolios
He said inflation affects your investments in two ways. On a general level, it affects your purchasing power and your minimum goal for investing.
“As inflation goes faster, you will have less purchasing power. And when you talk about investments, at the very minimum, they should beat inflation. Otherwise, your investments will lose value over time. High inflation increases your hurdle rate,” he said.
On a more technical level, which affects the financial markets, inflation is a welcome thing. It indicates economic growth as long as it is managed between the targets set by the Bangko Sentral ng Pilipinas (BSP).
“Inflation is a precursor for growth,” said Hernandez. “If inflation is within the BSP’s target of 2-4%, then financial markets should be neutral about it.”
Higher inflation is signaling the central bank to hike interest rates to give citizens an incentive to save their money instead of spending it. This tempers inflation by reining in demand for non-essential goods and services. For fixed income instruments such as bonds, this means yields will increase over time.
Inflation will also affect equities because the valuation of companies is based on computations that use interest rates to determine how much the company is worth. An unexpected swift rise in interest rates, therefore, affects these computations toward stock price declines.
Finding the right strategy
Risk events, or those unexpected events that affect financial markets, such as Russia’s invasion of Ukraine, are priced in by financial market participants, reflecting risk sentiment towards investment assets.
These events pushing inflation higher are perhaps priced in, according to Hernandez. But uncertainties remain, and there may be room for further increases.
You have the option of choosing between two types of portfolio management: active or passive. With the volatile environment that we have, it is best to be passive, said Hernandez.
Active portfolio management refers to intraday buying and selling, short-term buying and selling, and specific stock selection. Buy low, sell high is the mantra.
“This type of portfolio management is probably not the best one right now. Some academic literature shows that less than 10 percent of active managers actually get it right in highly volatile markets. Only a few people do so,” said Hernandez.
“The recommendation in high volatility markets is to stay passive and just track the index. Don’t do anything fancy, especially if the time dedicated for investment research and market trading is limited,” he added.
“At the start of the year—of course, this is already hindsight—it would have been better if you stayed in cash. But right now, after the markets have fallen, the recommendation is to go for fixed income, more than equities. Some yields are becoming attractive, especially for those who depend on interest from investments,” said Hernandez.
“To be honest, if you are not comfortable with volatility, then you might as well stay nearer the conservative side of things. Stay with fixed income and money market investments, then fight the battle when you are already comfortable. However, if you are invested already, just be patient,” he said.
One consideration is your time horizon.
If, say, you started with PHP 500,000 and it was whittled down to PHP 300,000, ask yourself, “Do I need this money by next year?”
If the answer is yes, Hernandez said it is best to keep it in cash and put it in a time deposit. If the answer is no, and you have a longer time horizon, say, five years, then you can be more aggressive in holding on to your investments until recovery, and in hunting for undervalued assets.
You could also consider tranche investing or cost averaging, said Hernandez. Divide your funds into tranches, then invest the first tranche when the market falls, the second tranche when it falls again, and so on.
He cautioned, however, that you should be prepared to stomach the volatility given current market conditions.
“If you have a longer time horizon and you want to bet on equities, go ahead. I’m very positive about the long-term returns when you’re invested in equities,” he said.
Final tips and recap
“Many are asking what to do to preserve their wealth. To be honest, just be patient. It is all about patience at this point,” he said.
“If you need cash next year, just stay in more conservative investments. If you are invested, be patient. Don’t buy and sell like crazy. If you’re invested in equities, just watch the index. As long as you can handle the volatility and you have a longer time period to invest, that’s OK,” he said.
One final tip: consult your investment specialist. Everybody can benefit from the experience and perspective of a trusted investment professional.
ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in corporate communications and has a master’s degree in technology management from the University of the Philippines. When not at work, he goes out on epic adventures with his family, practices Aikido, and sings in a church choir.