Active management as a means of fighting inflation

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Investors are hearing a lot about inflation and the rise in the Consumer Price Index (CPI) this year. And will the price increases be persistent or transient?

Whether inflation passes in a few months or proves to be sustainable, the point is, it is here today. This is a problem for retired or about to retire investors because inflation weighs on income. For retirees, there is another problem created by inflation: the increasing prioritization of how they spend their money.

“Inflation is not a monolith, with a uniform rate. The cost of groceries could go down, while the cost of health care goes up. Therefore, your experience with inflation will depend very much on where your money is going, ”according to research by Charles Schwab.

In the 2021 inflation scenario, the good news is that price increases in three categories of great importance to retirees – housing, food and, surprisingly, healthcare – are relatively moderate. Yet inflation may force some retirees to adjust their investment portfolios.

“The wisdom of conventional investing includes two strategies that are relevant to how retirees view inflation,” Schwab adds. “The first is that as you get older, it is better to reduce your holdings of riskier stocks in favor of bonds and more stable cash holdings. The second is the 4% rule for withdrawing your savings: the first year of your retirement, you withdraw 4% from your portfolio, then adjust that amount for inflation each year thereafter.

Some retirees may consider fighting inflation by holding higher levels of stocks than bonds, especially early in their retirement. However, some may want to play it safe with bonds. Those in the latter category may consider sprinkling some active strategies to take advantage of active managers who may overweight anti-inflationary bond strategies while tapping into higher income levels.

Perhaps now is the time to consider more active management of fixed income securities, as active bond managers generally delivered the goods to investors in the first half of the year.

Some ETF issuers are adding to their active fixed income listings, giving investors more choice. For example, T. Rowe Price recently published plans for the T. Rowe Price Total Return ETF, T. Rowe Price QM US Bond ETF, and T. Rowe Price Ultra Short Term Bond ETF.

For more news, information and strategy, visit Active ETF Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.


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