Real World Worries

“It’s the end of the world as we know it… And I feel fine.”  R.E.M., 1987

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No. You don’t have déjà vu, I used this line to open my last letter a few months ago. Since, the first half of the quote has held true, if not the second. In a few short months, the mood has shifted, dramatically. As a result, the calculus of much has changed and the landscape continues to move under our feet.

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Geopolitically, the world is again confronting the conflicting interests and visions between democracy and authoritarianism. These divisions no longer run solely along international and country lines. Today, these conflicts are deeply ensconced inside nations themselves, including the United States, where the politics are growing more divisive. The Russian invasion of Ukraine, the largest military conflict the globe has seen in decades, has the world questioning the progress of the post-World War Two era and of economic globalization as a driver of prosperity and peace.

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This means that the planning and investing calculi have changed, too.  In a flash, interest rates on all things bond-related – mortgages, car loans and government debt rose. The U.S. ten-year treasury bond, which is used as a benchmark for many lending rates, practically doubled, practically overnight. The Federal Reserve has stated its intention to continue to hike the fed funds rate, which will then increase rates for many other borrowers.

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Continuing to drive worry, the inflation numbers haven’t stopped flashing extremely hot as corporations raise prices on top of already steep rises in shipping and input costs. This drives interest rates higher too, but the ‘good’ news there is that, with higher interest rates comes higher income for those investors that are in retirement or simply more conservative. For longer term investors who are not concerned about income from their portfolios, the focus now turns to ‘real’ returns.

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‘Real return’ is defined as the amount of return that your money nets over inflation each year or over time. For example, if your portfolio returns ten percent in a year but inflation is running at five percent per year, then your real return is five percent – not as good. Conversely, if your money is in a bank account, earning one percent when inflation is running at five percent, then you are losing four percent per year on a real return basis – even worse. As advisors, the focus on real returns is always present. Our goal is to not only preserve but also grow purchasing power over time for our clients.  

A simple, often overlooked truth when we think about investing for retirement and life beyond work is that we must not stop, ever. When a certain goal is reached, such as paying for college, it will no longer require saving and investing for. However, as we age and convert retirement and personal accounts into income producing vehicles, we nonetheless can never ‘get up from the [investment] table’ and cash in all our chips. The dangers of inflation and earning negative real returns, where your money today will buy much less tomorrow are genuine and ever-present. Markets and the world at large will continue to behave in strange and unpredictable ways. There are times that require holding on just a bit tighter – this is one of them.

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Regards,

Scott Lasky, CFP™

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