Inflation is ramping up. Is that something to be concerned about? How might it affect your portfolio?

SMI's executive editor Mark Biller discussed those matters last week with host Rob West on Moody Radio's MoneyWise Live.

To listen, click the play button below. Scroll down for the transcript.

(And for more radio appearances by members of the SMI team, visit our Resources page.)

MoneyWise Live airs daily at 4:00 p.m. ET/3:00 CT. 


Transcript

Rob West:
With the Fed increasing the money supply and massive government stimulus spending the economy is showing signs of inflation. Investors are rightly concerned about it, but is the fear really warranted? I'm Rob West.

There are many reasons to be wary of inflation, but there's at least one factor that should keep investors from hitting the panic button. Investing expert, Mark Bller joins us today to talk about that. Then it's your calls at (800) 525-7000. This is MoneyWise Live where biblical principles guide our financial decisions.

Well, our good friend, Mark Biller is the executive editor at Sound Mind Investing, where his able crew has been keeping a sharp eye on inflation, and he has much to report. Mark, welcome back!

Mark Biller:
Hey Rob, good to be with you.

Rob West:
Why are people so concerned about inflation right now?

Mark Biller:
Well, there are really two things that are driving this inflation concern, Rob. The first is that anytime the government does anything new that looks or smells like "money printing," people get rightly concerned. And over the last year, we've seen unprecedented borrowing, plenty of new programs where the government's been sending multiple checks directly to people, and all that sort of thing. So people are rightfully paying attention a little bit concerned. And then you've got the fact that the Federal Reserve has been literally creating more money. Last year, the money supply increased a whopping 24%, which was the largest increase ever in the 150 years that we have data on that money-growth series. So we've got a couple of powerful things that we can check the box for on the theoretical side of potential higher inflation.

Then you just add in the practical — what people are seeing every day, all around them in terms of higher prices. You've got food increasing, these lumber stories we all keep hearing about, used cars — they're just a lot of prices that have been rising that are kind of in everybody's face. And there's really no debate about whether prices are rising right now. Just a couple of weeks ago, we got the first really big official inflation number. We got an inflation report that said that inflation was up 4.2% over a year ago. Now 4.2% may not sound like that much to people, but that was the highest level that we've had since 2008. So that's a long time and this is a big number.

So, a lot of inflation fear out there right now. And, you know, where the rubber really hits the road in terms of this program and our investing, if we have entered a new inflationary regime, there are really significant implications for the way investors should construct their portfolios.

Rob West:
Well, that really is the big question, isn't it, Mark? The fed calls this "transitory," which means they think it's going to be, short-lived. What say you? Have we entered into a new inflationary regime?

Mark Biller:
You know, it's a good question. It's a tricky question. And frankly, right now it feels a little bit like tilting against the wind because when you have the types of an inflation numbers coming in that we're getting right now, that we'll probably see next month, maybe the month after that — just because of these year-over-year increases from where we were a year ago — you know, it's hard to tell people, "Yeah, but just wait a little while and a lot of this is going to go away." But I would just say, if you think back to where we were a year ago, we had several months there in a row where we had some of the most massive deflationary numbers that we've ever seen as everything was shutting down.

And in the same way that back then there were a lot of us telling people, "Look, this isn't going to last forever — we're not in a permanent new deflationary regime," we would just caution people a little bit right now, as we're seeing these big inflation numbers, to maybe just hit the pause button a little bit and think about, "Is it really guaranteed that this is going to just continue indefinitely into the future?" After all, you know, we really were not in a big inflation push when COVID hit a year ago — so we have to think carefully about that.


Rob West:
Let me just mention phone lines are open this portion of the broadcast. We'd love to hear from you. If you have investing-related questions — maybe you're wondering about inflation and what you should do about it, or how should you position your portfolio, what about planning for retirement in this period where interest rates are low and as they had higher bond prices will be falling — whatever's on your mind related to investments and looking at those investments through the lens of God's Word, we'd love to hear from you. Questions for Mark Biller today: (800) 525-7000.

Mark, just before the break, we were talking about inflation, whether or not we've entered into a new inflationary regime. We've talked about the incredible monetary stimulus that took place during this self-induced recession brought on by a pandemic. But this idea of "money printing leading to inflation" is something we've heard before perhaps maybe during the global financial crisis. Is that right?

Mark Biller:
Yeah, that's exactly right, Rob. And that's one of the cautions that we've been looking at real closely and, and why we're trying to take a measured approach to this and not just jumping with both feet, like a lot of people are, into the "Oh, inflation is back" camp. You know, coming out of the global financial crisis, like you mentioned, there were a lot of voices calling for [i.e., predicting] much higher inflation — and in fact hyperinflation. And we, as investors, we actually saw a lot of the downside of that. This kind of speaks to the [question,] "Why does this matter so much?" You know, we saw a lot of investors that were coming to us for a few years after those calls were being made, saying, "Those expectations of hyperinflation and so forth, scared me out of the market. And here I am three or four years after the great financial crisis and I've been sitting on the sidelines this whole time. What do I do?"

So these issues that we're talking about today have really big implications for people. And that's why we want to try to take a real balanced view. You know, back then everyone was afraid of the Fed's new Quantitative Easing policies. They were just sure that was going to create all this new inflation. We had a new Democratic presidential regime with a new big policy with national health care and lots of new spending, but we never got those sustained big rises and inflation. We had a short-lived spike in commodity prices, just like we're seeing today, but then things settled down pretty quickly into a decade, really, of fairly low growth and low inflation. So it's a little bit of a reach to say that just because we're seeing, you know, the borrowing and this emergency response that we've seen over the last year, that this is going to be persistent into the future and cause sustained new inflation. That's really the crux of the issue.

Rob West:
Hmm, there are a couple of schools of thought about this issue, aren't there?

Mark Biller:
Yeah, there really are. And so one is obviously that we are in the beginning of a new, higher inflation regime. And this camp rightfully is pointing to things like the new child credits that are about to be paid out and some of the other stimulus measures and saying, "Look, the government now, in addition to the Federal Reserve, is giving people money directly. They're pumping it right into the economy and that's going to have a big impact." And that could be true. You know, we haven't seen that lately in the way that we're seeing it now. And so really the question there is how sustainable is that? Is the government, is Congress specifically in a position where they are going to just keep rubber-stamping more and more stimulus.

Now, just in the last week or two, we've seen a lot of the so-called red states kind of pushing back now and saying, "You know what? We're going to actually put our foot down on some of this additional federal government spending. We've had [Sen.] Joe Manchin [of West Virginia], probably the most conservative Democratic senator, saying "I'm not so sure about more stimulus." So it's not really a guarantee here that even if the president and his cabinet want to keep the spending pedal pushed all the way to the floor, that they're going to get everything they want.

The other side of this argument, Rob, is, you know, nobody's arguing that we're not seeing inflation right now, but the question is — the other side of this is — is this mostly due to the aftereffects of last year shutdowns and the disruptions that those have had on supply chains and on the supply of goods, which we all are seeing stories about how car companies can't get the semi-conductors they need to run their assembly lines full throttle, and things like that. But I think as we think carefully about a lot of those issues, most of us would say hose issues probably aren't going to last forever. As the economies reopen, a lot of these disruptions in supply will probably smooth out.

And the question is, when that happens are the factors that have been keeping inflation low for the past, really the better part of the last 40 years, are those factors going to reassert themselves? And those three big deflationary factors that are working against this inflation argument are the really high levels of global debt, the aging demographics around the world, really, and the continual increase in more and better technology. All three of those factors are very deflationary. And so it's really an uphill battle given that none of those three factors have materially changed to build the case that we're going to just see inflation as far as the eye can see.

Rob West:
Interesting. Well, clearly it may be premature to assume inflation is going to turn into a lasting problem today.

Mark, Matthew called in — he didn't want to be on the air, but asked "What about the possibility that inflation would have an impact on gold and silver?" How do you see that playing out?

Mark Biller:
Yeah, that's a great question. And I want to be clear that we're not sitting here saying, you know, you'd be foolish to do anything about the possibility of future inflation. We have made a number of changes this year in our SMI portfolios, which we can talk about a little bit later, to prepare and to take advantage of this inflationary impulse.

As far as gold and silver specifically, it's been kind of surprising — those have been some of the assets that actually haven't responded as strongly to this inflationary pulse over the last, say, six months as a lot of other commodities have. So you look at things like copper and lumber, and a lot of the other agricultural commodities, those have soared higher. Many commodities are up 50% or more over the last several months. Gold and silver have actually lagged. Now, I tend to believe that they are probably going to catch up to some degree if this inflationary pulse continues, but I would just note that they have not been the automatic "go-to" that a lot of people would naturally assume they would be in this specific inflationary pulse that we've had lately.

Rob West:
Interesting. We have some phone lines open — 800-525-7000. In this segment, questions for Mark Biller on investing.

And rose in Kyle, Texas, is up first today. Thank you for your patience, Rose. How can we help you?

Caller:
My question is I've been retired for about a year and a half. And so when I left my government job, I had about $80,000 and my 457 [retirement plan] and I've just kinda let it sit there. But now with the market, I'm just getting kind of afraid that I might lose it. I'm just wondering if there's something else I should be doing with it. I thought perhaps purchasing some land. I'm not sure what to do.

Rob West:
Do you know what what's your investment allocation looks like right now inside that 457?

Caller:
Well, I've got about 80% over, like in what they call "safe" investments. And then I've got the rest of it in a kind of like mid-aggressive. I know those are in Vanguard. The others are just a mixture of whatever they decide to do.

Rob West:
Okay. So, Mark, your thoughts? She's retired, $80,000, sounds like perhaps 80% leaning toward fixed-income type mutual funds, maybe the rest in a balanced approach. What are your thoughts?

Mark Biller:
Yeah, I'm not 100% sure of what those 457 designations are as far as "safe," but assuming, like you say, Rob, that the lion's share of that is in bonds. You know, I think that this inflation discussion is very relevant to this because bonds are the place that we would expect — if we do have a lot of inflation — we would expect bonds to struggle with that. Now, there are ways to moderate that by being in shorter-term bonds that shouldn't get hit as much if interest rates do rise. You know, there are always a lot of options, Rose. Buying some land, you know, real estate can be a good investment for a lot of people, but it's a much more difficult investment for most people. If you're trying to rent that or somehow get an income from that, that can be very difficult.

So that is the big advantage of having a more conventional asset-allocation mix like you have right now where those bonds can continue to provide some income as long as those are on the shorter-term side, shorter-term bonds. I wouldn't be particularly concerned right now about those being hit. Even if the stock market were to go down, we wouldn't expect those bonds to decline in value. The 20% or so that you might have that's exposed more to the stock market, you know, the reality is that if we have sustained inflation of any type, you really need some of that stock market exposure to help your portfolio keep up with the decline in purchasing power, which is really what we're talking about when we talk about inflation.

Another way of talking about that 4.2% rise in inflation over the last year is to say that your purchasing power declined by 4.2%. And that's why financial advisors typically will say even retirees need to have at least a little bit of stock-market exposure to try to keep their portfolio purchasing power growing through what can be a couple of decades of retirement. And so, you know, I think really to me, that allocation sounds pretty reasonable. Rob, what are your thoughts?

Rob West:
Yeah, I think you're right in the sense that, if we think about migrating over to real property, especially land where we've got to think about, you know, "Is it going to be built out the way we expected? And what about the access to roads and utilities?" And, you know, land is not income-generating because there's not any improvements that we can lease out. And as you said, Mark, it's more of an active investment where we've got some work to keep up with it — pay the property taxes, all of that — versus passive investing in the stock market.

I think the key, Rose is to get some competent counsel. I think Mark made some great points about the allocations you should be looking at and how you should be thinking about your investments in this season of life, and having a competent financial advisor — whether it's the team at soundmindinvesting.org or a Certified Kingdom Advisor in your area, which you could find at moneywiselive.org — somebody who can help you navigate this, build the right portfolio that has some element that's going to grow for the future, and that's going to generate income while we see how this is all going to play out.

This is not a new cycle. These happen, and we work our way through them. And the good news is if the Lord tarries and you have good health, this money needs to last for decades. Even once you reach retirement and having a properly diversified stock and bond portfolio can help you do that — with wise counsel. So hopefully that helps you today, Rose. We appreciate your call.

Let's quickly go to Karen in Florida. You're next on MoneyWise Live. Go ahead.

Caller:
Hi, thank you for taking my call. I know you don't have much time. I'm a federal employee so I'm in the TSP [Thrift Savings Plan], and we also are able to, with my job, be a part of T. Rowe Price. And I'm eligible to retire next year. I might stay four years longer, but I'm not sure. And have, like, 75% in the C Fund and the rest of the G and an F fund for TSP, and for T. Rowe Price, I have in [the] New Horizons [Fund], which I know is ridiculous, but it's so high — I mean the returns have been so high.

So I was just wondering, what do you think is an appropriate allocation?

Rob West:
Okay. If you hold the line, we're going to take a quick break, we're going to pause and we'll be back — and Mark will give you his thoughts. And then more of your calls: 800-525-7000. This is MoneyWise Live. Stay with us. More to come just after this.


Rob West:
Just before the break, we were talking to Karen. Karen is four years out, potentially, from retirement — she's thinking about continuing to work, even though she can retire next year. Mark, $900,000 in a TSP plan —Thrift Savings, $400,000 in T. Rowe Price. Probably 75%-plus of that is in, not only stocks, but concentrated toward technology. So given where she's at, how would you counsel her?

Mark Biller:
Yeah, I think Karen, especially given that you're concerned about a market pullback, given the timing of your retirement plans the simplest thing that you could do to reduce risk right now would be to cut the technology exposure that you have. Technology, you know, has been a wonderful sector for many years and last year it was, it was certainly the shining star coming out of the bear market a year ago. However, we have seen a pretty steady stair-stepping, if you will, of the most volatile riskiest areas of the market kind of getting thumped a little bit, one by one, as we've moved through 2021. And while broader technology stocks have not yet taken a big hit, if this pattern does continue, it's not unreasonable to think that technology stocks may suffer more than the broader stock market.

So that would be an easy step to reduce the T. Rowe Price, small-company, and specifically technology stock exposure. And to just even maybe move some of that, not necessarily even taking it out of the stock market, but maybe just spreading that around a little bit so that you have more of a mix with some value stocks in there. Maybe even a T. Rowe Price value-oriented mutual fund might do the trick for some of that.

The second really easy step to reduce risk would be to look at that overall stock-bond balance. And if it is somewhere in that 75/25 neighborhood, you could pull that back to 70/30 or 60/40 and add to the bond side, which would give you downside protection.

And, of course, these are not necessarily moves that have to be permanent. You know, if you pulled back to a 60/40 type allocation at this point, and then you were right, and you did see some kind of a stock market correction, there's nothing that says you can't take a little bit of that bond money and then re-enter the stock market at that lower point. Now, I'm not trying to advocate some kind of an active market-timing strategy for the average person. But again, when you're close to retirement, you have specific concerns about a market pullback.

These are just some way easy ways to get a little bit more diversified, reduce some of your risk exposure, and of course, you can dig in for a lot more detail by looking at some of the portfolio ideas that we have over at SMI — soundmindinvesting.org — if you want to dig a little more into some other options on how you can diversify further.

Rob, any other thoughts?

Rob West:
Well, it's great counsel, Mark. And the only thing I would add Karen is just this idea that you should really be thinking about answering the question, "How much is enough?" and drawing that financial finish line, such that beyond that you would drastically reduce the level of risk because there's no need to take risk unnecessarily. And, too, once you reach enough, whatever that is between you and the Lord — both income-wise, as well as balance-sheet-wise from an asset accumulation standpoint — you can dramatically increase your giving. And I think that's one of the opportunities we have. You know, we hear from people on this program who are in a desperate financial situation trying to find God's heart, and those who have been diligent and followed biblical principles and they have way more than they need. And we're all just trying to be faithful stewards along that journey, wherever God has us.

And if you could use some assistance in that, Karen, I'd encourage you to connect with a Certified Kingdom Advisor there in Florida. Just go to moneywiselive.org. We appreciate your call.

Quickly to Bobbi in Chicago. Go ahead.

Caller:
Hi, my husband and I just received a partial payout on an inheritance of $100,000, and I'm petrified of investing right now with the way the market is and under this administration. We just put the money right now into our money market temporarily, but I don't know — that's probably not the wisest thing to do — I just don't know what to do with this $100,000.

Rob West:
Sure. Bobbi, tell us just quickly about the rest of your financial life. Are you all actively working — you or your husband? Are you in retirement?

Caller:
Yes, my husband and I are 66. We are working right now. In just savings, we have about $130,000. And then in retirement, we have about $135,000 jointly, and we have no debt.

Rob West:
And the $130,000 in savings is in addition to this new inheritance money?

Caller:
That is correct.

Rob West:
Okay. So you have about $365,000 in potentially investible assets, including your savings.

Caller:
Correct — and we probably will be getting another $60,000 at the final — whenever the estate has completely settled.

Rob West:
Okay. And are you all planning to work for a bit longer?

Caller:
I don't want to work. My husband would like to work till least 70.

Rob West:
Very good. And as you look at your lifestyle and what it's going to take to fund that, and you look at perhaps Social Security, how much do you think you're going to need to generate a month in income just to make ends meet?

Caller:
Well, since we have absolutely no debt, I would imagine maybe $2,000.

Rob West:
Okay. Mark, what are your thoughts as they think about the next five-to-10 years?

Mark Biller:
Yeah. I love the way you always approach these, Rob, with the questions that you ask — because you really do want to approach, "What do I invest in?" through the lens of "How much risk do I need to take to meet my goals?" And that's something we often remind our SMI members about — that you don't want to take more risks than you have to. Because sometimes people feel a little funny when they kind of downshift on risk, if they're not taking the amount of stock market allocation that they think is normal for their age or whatever. But we always want to encourage people, "Don't take more risks than you need to."

And the way that you figure that out is by starting with the types of questions that Rob was leading with: "How much do you need to sustain your expenses in retirement?" So if that answer is "Relatively little," if you're close to meeting those goals, then I would recommend focusing on relatively safer investments — shorter-term bonds, that type of thing — and only throttle-up from there if you need to

Rob West:
Very good. Bobbi, thank you for your call today. If you need someone to walk alongside you with godly investment advice, go to moneywiselive.org, and search for a CKA.

Mark Biller, thanks for being with us, my friend.

Mark Biller:
Thanks, Rob. Always good to be with you.

Rob West:
Learn more about Sound Mind Investing at soundmindinvesting.org, where you'll find the article we were talking about today.

Stay with us more to come on MoneyWise Live. We'll be right back.