Do You Really Need a Financial Advisor? Investing Mistake #1: Not Considering Inflation!

As a financial advisor in Woodbridge, CT, as well as the founder and president of Heritage Capital, I see some of the same dangerous mistakes made by DIYers (and sometimes bad financial advisors) when putting together a financial plan. It is not properly factoring in the detriments of inflation.

Inflation is a general rise in prices over time, which reduces your purchasing power. In other words, it cuts your standard of living. It’s been tame for years, but don’t be fooled – it started to return in 2020 and is increasing in 2021. If you aren’t prepared, it will rob your retirement nest egg of much of its value. The older you get, the more pronounced the damage. If you are managing your own retirement savings without the help of a professional, you may be making mistakes that will cause you to outlive your money.

Just think about what inflation will do to your healthcare costs alone! In early retirement, you might be on the go, but in later years, you’ll likely spend more money on medical care and basic costs. Unfortunately, the price of healthcare has been increasing at a rate much higher than that for general inflation. For example, healthcare expenditures increased by 4.6 percent in 2018 versus 2.4 percent for inflation. Failure to prepare now for medical inflation could be catastrophic in the decades ahead.

This same report shows that a 3 percent inflation rate (the historical average) could rob your Social Security benefits of $117,000 in value over a 20-year period. That’s the figure for retirees with moderate spending levels – the impact is even greater if your spending is higher. In some years when average inflation is low, the Social Security Administration doesn’t issue a cost-of-living increase, even if healthcare costs are higher.

And healthcare spending isn’t the only concern.

Many seniors spend money on travel, housing and helping their adult children with their finances. In my experience, new retirees often spend more in the first two years after retirement than in the two years preceding. In effect, new retirees face lifestyle inflation.

The good news is you are not powerless in the fight against inflation. There are steps you can take both in your investment strategies and in other parts of your life. There are also investment mistakes that you can avoid. I’ve seen inflation overwhelm investors who make 5 common mistakes.


Does your financial plan account for inflation? Schedule a no-obligation conversation with the team at Heritage Capital.


Mistake #1: Failure to Pick Investments that Rise During Inflation

Retirees tend to become more risk-averse as they age. In a way, it makes sense, since you have less time to recover from investment mistakes. But the problem is that a risk-averse attitude will rob your portfolio of the assets it needs to keep pace with inflation.

Generally speaking, those investments are stocks, which historically have been the best, but not only way to stay ahead of inflation, especially unexpected inflation. If you do your own investing and are risk-averse, very little to none of your portfolio may be in stocks, whereas a financial advisor can assess your risk tolerance and explain in detail what more risk looks like and could mean.


Mistake #2: Not Picking the Right Stocks to Combat Inflation

Did you know that value stocks perform better than growth stocks during higher inflation? The reason is that the discounted cashflows of value stocks increase with inflation, but growth stocks have much smaller cashflows, creating a negative correlation with inflation.

Many DIY investors aren’t aware of this. When inflation is low, these investors are likely to put their stock money into growth stocks, since that sector will do better in a low-inflation environment. The problem is failing to shift to value stocks before inflation picks up. That can hurt the overall return of your portfolio.


Mistake #3: Over-Reliance on High-Dividend and Income-Oriented Stocks

High-dividend and income-oriented stocks may be a good choice when inflation is low, but these stocks can decline when inflation is rising. The reason is that dividends usually don’t keep up with higher inflation. That’s a double-whammy, since your purchasing power is decreasing and you are double-taxed on dividends – once at the corporate level and again on your personal returns.


Mistake #4: Overinvestment in Fixed-Income Securities

When inflation is low, bond prices are steady and seem secure. Those prices fall when inflation spurs higher interest rates, sending the prices of existing bonds lower.

Many DIY investors aren’t aware of inflation-protected fixed-income investments or don’t bother with them when inflation is low. These investments include Treasury Inflation Protected Securities (TIPS), inflation-protected bond funds, and floating rate funds. As a financial advisor in Woodbridge CT, I’m able to explain the pros and cons of these investments to my clients and how they can help their portfolio resist the ravages of inflation.


Mistake #5: Lack of Diversification

While stocks are the classic hedge against inflation, they are by no means the only one.

DIY investors might not be aware of alternative investments and how they can increase the efficiency of their portfolios while hedging against inflation. These include real estate investment trusts, commodity funds, and buffered exchange traded funds. Each of these have unique risk/return profiles that again, as a financial advisor in Woodbridge, CT, I am able to explain to my clients, so they understand how to incorporate these assets into their portfolio correctly.


Other Mistakes to Avoid

Investing mistakes can be very costly, but so can other types of misjudgments.

For example, failing to get the most out of your Social Security benefits unfortunately happens all the time. There are important decisions that many retirees don’t realize to ask on their own:

  • Does your non-working spouse collect benefits based on his or her earning record or on yours?
  • Did you know that you can increase your benefit if you work at least 35 years?
  • Have you worked out the advantages of waiting until age 70 to file for benefits?

A financial advisor can thoroughly explain your options to ensure you squeeze the most value from Social Security, which will come in extra handy if inflation rises after you retire.

Another common mistake is failing to reduce fixed costs, such as housing, once you retire. Even if you’ve paid off your mortgage, downsizing to a smaller home can mean smaller cash outflows for utilities, property taxes, maintenance, HOA and insurance. Furthermore, many retirees use the excess proceeds from the sale of their old home to invest in inflation-savvy assets.



You can’t afford to bet against inflation, even if it seems only a distant problem right now. Conditions can change in a hurry (the COVID-19 vaccine is a case in point), and you can be left flatfooted and defenseless against inflation. A good fiduciary financial advisor can make all the difference in your preparedness, while going it alone is fraught with risks.

If you’re looking for a financial advisor in the Woodbridge, CT area, let’s talk! If you’re outside the Woodbridge area, Heritage Capital works with clients across the country, so we’re prepared to connect over email, video conference, meet in person or just pick up the phone and call. Schedule some time with me directly by using this link. I look forward to our conversation.


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Paul Schatz, President, Heritage Capital