where is inflation going? Any changes to your investment strategy?

[mistymoney]

so - how long and how deep do you think this inflationary period is going to be?

the stagflation years were the ones that tripped up my simulations on retiring -  even retirements started before stagflation - so simulations modeled on late 60s through 70s. I haven't redone since the recent decline in values. The only thing I could simulate to make it work was a lower than 4% wr. Of course, none of the simulations can account for all variables, but I'm feeling retirement drift off farther and farther down the line with a lower balance and higher COL than I was modeling on.

Any changes you are making or may plan to make if this deepens?

What about a prolonged period of stagflation?

At least I'm still investing every payday. I tell myself thats got to be moving me forward even if I dont see it yet.

[EscapeVelocity2020]

Guess it depends on how old you are (for example, being closer to medicare eligibility would be helpful, unless ACA subsidies become indexed to inflation) and how close you are to FI.  Like all things, I'm taking a balanced approach now that I'm FI, and my portfolio is drifting toward being more defensive on its own.  This is why folks shouldn't be 100% equities, IMHO, and it's also a good time to consider getting a mortgage on a dwelling if you can afford it. 

[mistymoney]

Guess it depends on how old you are (for example, being closer to medicare eligibility would be helpful, unless ACA subsidies become indexed to inflation) and how close you are to FI.  Like all things, I'm taking a balanced approach now that I'm FI, and my portfolio is drifting toward being more defensive on its own.  This is why folks shouldn't be 100% equities, IMHO, and it's also a good time to consider getting a mortgage on a dwelling if you can afford it.

could you elaborate that a bit?

my first thought is that you are currently allocating to mix of stocks with bonds or a higher % of bonds than you had previously and that over time the bonds are becoming a higher percent of your stach.

Or is it something else?

[vand]

I think it will continue, in peaks and troughs, until people are so sick of it that the adminsitration of the day will be forced to really tackle it, and I don't mean just the jawboning that we are getting from TPTB right now.  We are nowhere near to that point, unfortunately. It is a process that will take years to play out. 

Inflation has always been underestimated, because it is difficult to predict and trashes even the most advanced economic models. Economists tend to get upset when their models are proven wrong, so they conveniently ignore it, and then when it happens claim "black swan". 

I read an article that pointed out that at this time last year, the consensus view amongst economic forcasters put the chances of US inflation exceeding 4% in 2021 at absolutely zero. Not 1%, not 0.1%, not 0.001%, but 0%. As it turns out, it actually average above 5% in 2021. 

[EscapeVelocity2020]

Guess it depends on how old you are (for example, being closer to medicare eligibility would be helpful, unless ACA subsidies become indexed to inflation) and how close you are to FI.  Like all things, I'm taking a balanced approach now that I'm FI, and my portfolio is drifting toward being more defensive on its own.  This is why folks shouldn't be 100% equities, IMHO, and it's also a good time to consider getting a mortgage on a dwelling if you can afford it.

could you elaborate that a bit?

my first thought is that you are currently allocating to mix of stocks with bonds or a higher % of bonds than you had previously and that over time the bonds are becoming a higher percent of your stach.

Or is it something else?

Exactly as you said, I was roughly 60% equities and 40% bonds (TIPS, munis), cash, stable value coming in to 2022.  With the drop in equities, my asset allocation is now 50/50.  I have a choice to make about when to rebalance, but it has softened the blow of the drop.  Of course, this meant that I missed out on some of the gains like the 2021 Santa Clause Rally, but remaining FI was more important to me than getting my SWR down further.

[SwordGuy]

so - how long and how deep do you think this inflationary period is going to be?

the stagflation years were the ones that tripped up my simulations on retiring -  even retirements started before stagflation - so simulations modeled on late 60s through 70s. I haven't redone since the recent decline in values. The only thing I could simulate to make it work was a lower than 4% wr.

The original Trinity study failed 5% of the time at the 4% withdrawal rate, so it's no surprise you went below 4% SWR to make things work. :)

The original Trinity study also required people to do stupid things like maintain their WR at all times no matter what.  No cutting back on expenses.   No deferring expenses.    No part time work.   Just unflexibly follow the 4% plan.   Only idiots or the clueless would do that.

There are gobs of things one can do to plan for the 5% failure rate in the Trinity study.   This thread probably covers most situations and most options by now: https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/

We have 4 different income streams active (and a 5th in incubation) and a fair bit of fluff in our FIRE budget, so I'm not really worried.   We could massively cut expenses if we needed to and if worse came to worse, go make more money.

[DaTrill]

These trends usually go higher and last longer than anyone can predict when they begin.  I've been lucky that where I live has not experienced much inflation (also not much economic growth) but rents in many urban areas have gone up 20% over last year. 

The best investment advice I ever received was "The trend is your friend".  I've changed allocation from 95+/5 to 30/70 since the start of the year as the trend of tech appears to have changed radically.  Dumped all tech and trimmed S&P 500 for value/dividend/energy ETFs.  Will use short term 1 year CD/Treasury ladders as rates will most likely go up in the near future. 

I've been coast FIRE for more of the past decade and will stop working this year, which also contributes to the change in AA in addition to change in market conditions.     

[waltworks]

I planned for the potential for inflation years ago by getting a low rate mortgage for the longest term on offer and paying the minimum.

Otherwise, nothing.

My personal belief is that supply chains will go back to functioning normally and this will be in the rear view mirror in 6-24 months, depending of course on covid cooperating. In the long run we're Japan, the demographics of the US just don't support an inflationary economy. Too many old people, not enough babies.

I've learned over the years that my personal beliefs about the economy are not usually very useful, so I just invest optimistically and hold onto my 3% mortgage. No worries.

-W

[ToughMother]

It isn't the inflation that I'm concerned about per se, but rather the increased probability of recession following the uptick in interest rates to deal with the inflation.

I'm hoping to pull the FIRE trigger this summer, so I want to set up some bucket of our funds that could weather a recession that lasts for a bit. I have that now, with about two year's worth of expenses. I'm doing some research about what it would look like to extend that time frame (say, at least 5 years).

We also refinanced our mortgage, down to 2.75%.

[PDXTabs]

I think it will continue, in peaks and troughs, until people are so sick of it that the adminsitration of the day will be forced to really tackle it, and I don't mean just the jawboning that we are getting from TPTB right now.  We are nowhere near to that point, unfortunately. It is a process that will take years to play out. 

Don't central banks have more of a role to play than any political administration?

[ChpBstrd]

I've dialed back a lot of risk after losing a lot of money (on paper). I do not want to fight the fed. It's risky even if they are only raising rates maybe 2% in the next 2 years, because valuations are so high. You also don't want to realize this summer that rates will actually probably go up at least 5%.

Two big events are about to drive the costs of goods higher:

1) Russia sanctions are driving oil prices through the roof. Such episodes are often associated with US recessions, especially when the Fed is raising rates anyway.

2) China's Great Wall against COVID is collapsing. Hong Kong just reported more cases than the Entire United States. This means more closed factories, product shortages, and logistics nightmares. In addition, the Chinese economy could dip into recession or near-recession - which is a big chunk of the world economy.
https://fortune.com/2022/03/03/hong-kong-covid-cases-government-camps-isolation-facilities-us/

It all depends on whether the influx of cash in 2020-2021 continues to circulate in the real economy, or how quickly it ends up stagnating in the accounts of rich people and governments. Unlike in 2008, the 2020 helicopter drop was aimed largely at the middle class, which rapidly spent their stimulus checks and boosted aggregate demand / monetary velocity beyond expectations.

This, coupled with pandemic-related supply and transportation shortages, led to the high inflation of 2021-22. However, those piles of cash are steadily making their way to America's trade partners to the tune of $859B in 2020 and probably more in 2021. These trade partners buy investments with the dollars, propping up dollar-based stocks, bonds, and real estate. In this way, the dollars leave the real economy of retail transactions and wages, with little effect on supply, demand, or prices.

The question is whether these disinflationary factors:
1) The end of QE,
2) The end of pandemic-era stimulus programs,
3) Rising interest rates, and
4) The ongoing trend of newly-created dollars getting locked up in investment accounts and foreign bank reserves

Will outpace the effects of these inflationary factors:
1) Rising commodity prices,
2) Shortages of manufactured goods related to fresh COVID outbreaks in China,and
3) Rising inflation expectations

Your guess is as good as mine. I'll be making no bold bets for a while.