Inflation Risk: Persistent or Transitory is the Wrong Question

Instead of pondering whether inflation is a real threat, a more pertinent question is whether your clients' portfolios are prepared for it. Too often, the answer is no. This is because the average portfolio is not well suited for handling a variety of adverse market conditions. And over the last decade plus, they haven’t needed to be.

Most advisors and allocators continue to build 60/40 or 70/30 stock and bond portfolios. These standard allocation models have worked well since the 2008 financial crisis when the most important investment decision was simply to stay off the sidelines, maintain an allocation to stocks and bonds, and let a market rebound and falling interest rates take care of the rest.

But the threat of inflation, and rising interest rates that would eventually follow, serve as a cautionary reminder that market conditions change and old threats often re-emerge.

Inflation Concerns Mount

Mentions of inflation during S&P companies' earnings calls have risen over 1000% year over year.

As the chart shows, inflation is a growing concern. Instead of gauging whether the threat is real, investors may benefit from proactively building a portfolio that can better withstand it.