Active Management as a Means of Fighting Inflation

Investors are hearing plenty about inflation and the rising Consumer Price Index (CPI) this year. And will price increases be persistent or transitory?

Whether inflation passes in a few months or if it proves long-lasting, the fact is that it is here today. It’s a problem for investors in or near retirement because inflation strains income. For retirees, there’s another issue created by inflation: increasing prioritization of how they spend their dollars.

“Inflation isn’t a monolith, with one uniform rate. The cost of groceries might fall, while the cost of healthcare surges. Consequently, your experience with inflation will depend a lot on where your dollars go,” according to Charles Schwab research.

In the 2021 inflation scenario, some good news is that rising prices in three categories of high importance to retirees – housing, food, and, surprisingly, healthcare – is relatively tame. Still, inflation may force some retirees to make adjustments to investment portfolios.

“Conventional investing wisdom includes two strategies that are relevant to how retirees think about inflation,” adds Schwab. “The first is that, as you age, it’s best to scale back your riskier stock holdings in favor of more-stable bonds and cash investments. The second is the 4% rule for drawing down your savings: In your first year of retirement, you withdraw 4% of your portfolio and then adjust that amount in line with inflation each year thereafter.”

Some retirees may be considering combating inflation by holding higher levels of equities than bonds, particularly early in retirement. However, some may want to play it safe with bonds. Those in the latter category may want to consider sprinkling in some active strategies to gain the benefit of active managers that can overweight inflation-fighting bond strategies while tapping into higher levels of income.

The time could be right to consider more active management in fixed income because active bond managers, broadly speaking, have delivered the goods for investors in the first half of the year.

Some ETF issuers are adding to their active fixed income rosters, meaning more choice for investors. For example, T. Rowe Price recently released plans for the T. Rowe Price Total Return ETF, T. Rowe Price QM U.S. Bond ETF, and T. Rowe Price Ultra-Short Term Bond ETF.

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