I’m the US chief economist at Vanguard, and here are 5 things investors should consider now amid high inflation

“High inflation is unlikely to become a permanent feature of the economy,” said Vanguard’s U.S. chief economist and head of portfolio construction Roger Aliaga-Diaz.


Despite the Federal Reserve’s continued attempts to drive down soaring-high inflation this year — raising the federal funds rate to 3-3.25% — it still may be some time before we reach the central bank’s ultimate goal of 2%. Today, food prices are more than 11% above where they were a year ago, while gasoline is up more than 25% and electricity costs up more than 15%, according to the U.S. Bureau of Labor Statistics. Altogether, the seasonally adjusted inflation still stood at 8.3% over the past 12 months in August. With that in mind, we asked Vanguard’s U.S. chief economist and head of portfolio construction Roger Aliaga-Diaz what investors need to know when it comes to planning during these unique times.

1. Inflation rates aren’t forever

“High inflation is unlikely to become a permanent feature of the economy,” Aliaga-Diaz assured, adding that “central banks are trying hard to bring it down” though that “may cost them a mild recession.”

2. Look ahead

To anyone looking to make “changes to your portfolio based on recent past performance,” he said that it’s “never a good investment strategy, whether markets have been rising or falling,” adding that “this also applies to the inflation-driven spur in market volatility of this year.”

Instead, Aliaga-Diaz says the best strategy is to look ahead “over medium and long-term horizons,” and that the “odds are that markets will be better than the last few months.” Furthermore, he notes, that “investors should expect that over the medium and long-term, the market will eventually get back to normal” and they should “remain invested.” 

3. Beware of this ‘unexpected shock’ to stocks and bonds

One critical factor for investors to consider is how inflation can impact investment portfolios, he says. “It isn’t high inflation per se,” but rather “the unexpected shock of going from low-to-high inflation that causes both stocks and bonds to re-price lower to the new inflation regime.” He explains that “once in the high inflation regime, high bond yields and lower equity valuations can produce positive real, inflation-adjusted returns for investors once again.”

4. Do not divest

Now isn’t the time to divest out of stocks and bonds for two reasons, he says. “First, after the initial repricing of stock and bonds to a new inflation regime, market returns that follow can be positive in real inflation-adjusted terms,” he says.

“Second, starting from a high inflation regime, there are fair odds that the next move in inflation could be down, back to a more normal inflation level, in which case there may be additional upside to both stocks and bonds as they re-price.”

5. Retirement investors must stick to the plan 

Retirees and investors near retirement are in an especially unique predicament, “as they need to withdraw from their retirement portfolio to fund living spending needs,” he explains. “That’s a double-whammy for them because they need to sell at the market bottom and the purchasing power of their retirement savings is lower due rising costs of living.”

In these particular scenarios, Aliaga-Diaz says he hopes “retirees that have been disciplined in terms of saving and staying invested in the markets over the last few years have built enough cushion through the long bond bull-market and the strong performance of stocks over the last few years,” adding that a “generic 60/40 portfolio experienced over 40% cumulative return over the three previous years.”

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