When Prices Keep Rising — and Markets Keep Falling

Source: Bloomberg

Inflation is up. Your portfolio? My bet is it’s down. (If not, please let us know your secret.)

Yesterday an eagerly anticipated gauge of US consumer prices showed inflation up more than expected for the month of April. We wrote about what you can do to protect your budget. (Hint: Try “trading sideways” instead of trading down, if you can.) But what about your investments?

Stocks fell in the aftermath of the inflation figures. A massive selloff wiped $200 billion off the cryptocurrency market in a day. That only added to weeks of bad news in markets, inspired largely by concerns about inflation and the Federal Reserve’s response to it. Three days of heavy selling in technology stocks recently erased about $1.5 trillion in market value from the Nasdaq. This year the S&P 500 is down around 16%. Retirement funds are getting pounded and a Morgan Stanley study found that retail investors who began trading when lockdowns started in 2020 have now lost all the gains they made.

The standard advice in turbulent markets is just to look away. As Bloomberg Opinion writer Mark Gongloff notes that for your 401(k), “it’s possibly the soundest advice you can get. People who ignore it are prone to panicking and making even bigger mistakes.” Yet he points out that the democratization of finance — the fact that we can access our investment accounts whenever, wherever we want — makes following this advice more difficult than ever.

If you can’t look away, maybe consider my colleagues’ helpful article on how to think about market turbulence at different stages of life. For some, now may be a good time to pick up high-quality stocks on the cheap.

Taking a more granular look at what’s happening with inflation might also help you find some opportunities. The rate of goods and other commodities inflation actually declined in the latest figures, while services costs increased by the most since 2001 on a monthly basis.

“Even if consumer confidence is a little shaky because of goods inflation, their desire to spend on services is clearly overcoming that fear,” said Mark Struthers, a financial planner at Sona Wealth.

He says investors who already have their bases covered might follow this shift by investing in services companies that focus on experiences: airlines, restaurants, cruises and theme parks. He generally advises against investing in individual stocks but says ETFs with services companies may be a good way to go, with the caveat that experiences are often the first to be cut if a recession strikes.

What about property? Real estate investment keeps coming up in Kevin Hegarty’s calls with clients. The principal at Hegarty Advisors says clients are flocking to real estate as a hedge against inflation, but often without taking into consideration the downsides of buying a second home or investment property.

“Folks who’ve never been a landlord totally discount the headache, the time, the costs, associated with real estate,” he says.

Hegarty says real estate should make up around 10% of a portfolio. Those considering buying an investment property should have significant liquidity invested outside their retirement portfolios first. And he says new investors should buy locally and start small. He says anyone who feels like these inflation numbers are a sign to rush out to an open house this weekend might want to slow down and think about a more liquid asset instead: the humble REIT. — Charlie Wells

Send us questions about your own financial dilemmas to  bbgwealth@bloomberg.net.

Don’t Miss

Opinion

In Bloomberg Opinion this week, Alexis Leondis says Vanguard investors’ tax woes don’t have to happen to you:

For anyone who is currently invested in a fund that made a big distribution last year, proceed with caution. If you’ve held the fund for a while, selling now would be foolish since you’re likely to incur capital gains of your own making. You may be in the driver’s seat, but the tax pain could be a lot worse.

Read her full argument here.

You Ask, We Answer

I served on federal jury duty for seven weeks in the fall of 2021 and received $1,340 for it from the U.S. court system, from which I received a 1099-MISC. My employer allows employees to turn in the jury-duty pay to the employer and receive regular pay for the time missed. The jury-duty pay became part of my AGI and I paid tax on it, in addition to my regular salary. I approached my employer about reimbursing me for the admittedly small amount of tax, since they took the payment. My employer is telling me to speak to my tax adviser, which I do not have. Is asking for the tax a reasonable request? — Janet Hemingway, 70, Philadelphia

The IRS instructs that people should both include the pay on their tax returns (like you did) and deduct the pay amount as an “adjustment to income” on the same tax return to avoid paying double taxes. You can file an amended return to exclude the jury pay from income and claim a refund for the additional taxes. As far as employer reimbursement, any payment will itself be taxable income, so a “gross up” calculation to increase the reimbursement by the expected taxes might be warranted. Possibly look at your marginal tax rate and confirm how much jury pay was taxed at your marginal rate which might be a better gauge of the actual liability. Again, filing an amended return to get a refund is one option that aligns with the correct IRS treatment. For reimbursement, confirming the actual rate (marginal) applied to the pay would be the first step and then asking for a “gross up” to make sure you are covered for the additional taxes on the reimbursement. — Elliot Pepper, financial planner and director of tax, Northbrook Financial