Jeff Witz, CFP

 I understand the basics of inflation, but what is the greater impact of increased inflation on the economy?

Inflation is the concept that the cost of goods and services increases over time. What a dollar can purchase today is going to be more than a dollar will be able to purchase 20 years from now. The purchasing power of that dollar diminishes over time as the prices of goods and services increase. Many people think of inflation as having a negative impact because they must spend more to purchase the same items. However, inflation can serve as a healthy component in an economy’s growth.

Inflation is not the increase in price of a single good or service, but rather of a broader basket of goods and services. For example, if the price of avocados increases due to a rise in popularity or lack of supply due to drought, flooding, or conflict, that is not considered inflation. The rest of the economy would carry on largely unaffected. In the United States, the standard used to measure inflation is the Consumer Price Index (CPI). The CPI is a measure that examines the weighted average of a “basket” of consumer goods and services. This assortment is intended to mimic the products and services commonly purchased by U.S. consumers and includes items such as food, energy, clothing, housing, medical care, education, communication, and recreation. The weighted average of these goods and services produces a percentage that is reported as the rate of inflation.

Although economists often disagree about the exact numbers, it is commonly believed that inflation in the range of 5% to 6%, or below, is healthy for an economy, whereas inflation rates of 9% to 10% or higher are harmful to the economy.

Here are some of the common effects that inflation can have on consumers and the economy:

As stated earlier, when inflation raises prices, the purchasing power of a dollar diminishes. Consumers will have to spend more money to purchase the same items. Those hit hardest are the ones holding cash or who are on a fixed income that is not inflation adjusted annually. Over time, their purchasing power can be significantly impacted.

If consumers and businesses suspect inflation is on the rise, and fear that the value of their dollar will diminish, they attempt to spend that money before that occurs. In other words, they’ll likely worry that cash will only lose value due to inflation, so they’ll reason that it’s better to get any necessary shopping out of the way and stock up on things that probably won't lose value. In turn, increased spending by consumers and businesses positively impacts the economy.

As consumers and businesses spend more, more money enters the money supply and inflation continues to rise. To curb run-away inflation, the Federal Reserve Board will increase interest rates. Higher interest rates mean higher payments when borrowing money. This causes consumers and businesses to reconsider taking out loans to make major purchases. The money that would have been used as a down payment or as collateral now stays in their bank accounts earning interest. Consequently, less money is spent and less money is in the money supply, which slows the rate of inflation. 

 Borrowers who already took out debt, such as a fixed-rate mortgage, will likely benefit from inflation. The value of their monthly mortgage payments will decrease over time. A fixed payment of, say, $2,500 per month on a 30-year mortgage will decrease in value over the lifetime of that loan. Assuming the borrowers’ income is growing along with inflation, it will feel like they are paying less over time. However, borrowers who are in variable debt products will likely see their payments increase over time so that the value of those payments are keeping up with inflation.

One way to offset rising prices is to purchase stock in the companies that are benefiting from receiving more money due to higher prices. As the companies earn more for the products they make, their stock prices will tend to increase. The value of an investor’s money will increase as the stock price increases which will offset some of the impact of inflation.

Many consumers feel the immediate impact of inflation and interpret it as a negative. Spending more on an item you are used to buying never feels great. However, modest inflation does serve an important service to the overall economy. As long as the rate of inflation stays within a healthy range, it is something to take advantage of rather than fear.

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Inflation within healthy ranges can be advantageous for consumers.

Urology Times Money Matters: How does increased inflation affect the economy?

A colleague shared with me that they created their own estate plan on a website vs using an attorney. Is that a good idea?

Having a good estate plan can be critical to ensure your family is well taken care of after you are gone. Although the quality of online tools continues to improve at a good pace, working with an experienced estate planning attorney remains the best way to ensure assets are distributed according to your wishes and in the most tax-efficient way possible. The drawback to using an attorney is often the cost, as some can charge a significant amount of money for their services. Sometimes people attempt to make an estate plan online without consulting legal and financial professionals to avoid the higher cost. However, everyone’s situation is unique, and using a boilerplate estate plan can lead to mistakes.

Here is a list of potential estate planning mistakes you can help avoid with professional counseling.

Your life and financial circumstances may change, so it’s a good idea to review your estate plan at least once a year. For instance, if any of the following life changes occur, your estate plan should be modified accordingly:

• Your parents have died, so they can no longer be beneficiaries.

• Your children have gotten married and/or had children of their own.

• Your assets have grown or decreased significantly.

• You no longer own a home or you purchased additional property.

For many of the same reasons listed above, make sure the will you drafted many years ago is still applicable. Some people believe that if they scratch out a part of an old will, add information, and initial the document, it will be valid. This is never the case.

Relying only on joint tenancy to avoid probate. 

Many assets are transferred outside wills. For example, assets titled in joint tenancy pass to the surviving joint tenant, not per the terms of your will. Many feel that you and your spouse should own a home as joint tenants to avoid probate. This move actually avoids probate only on the first death. When the surviving spouse dies, the home will typically end up in probate.

 Creating a trust and transferring assets to it may help you avoid probate and save taxes. However, if you have a will and a trust, be sure the documents are aligned so your wishes will ultimately be carried out. If a will and a trust are not in agreement, delays and unnecessary costs may be incurred.

 You want your intentions to be carried out for all assets, including your primary residence, additional residence, bank accounts, brokerage accounts, retirement accounts, and even vehicles. Be sure to make beneficiary designations and properly title accounts. Designate a beneficiary or beneficiaries on all individual retirement accounts, employer-provided retirement plans, and other qualified accounts. Take time annually to review the beneficiary designations as they will control the distribution of those assets.

Not naming successor or contingent beneficiaries. 

Let’s say you name 1 beneficiary on an account and that individual dies. If you do not update the beneficiary designation, there will be no successor to receive the account assets upon your death. It is important to name more than 1 beneficiary on accounts and to keep your designations up to date when named beneficiaries pre-decease you.

Failing to name a person to make health care decisions. 

All 50 states permit you to express your wishes as to medical treatment and to appoint someone to communicate for you in the event you become incapacitated. Depending on the state, these legal documents are known as living wills, medical directives, health care proxies, or advance health care directives. On 1 of these legal documents, designate someone you trust to make sure your wishes are carried out.

Relying on outdated or stale financial powers of attorney. 

You may have selected someone to make financial decisions for you with a power of attorney. However, after you signed the document, your circumstances or your relationship with the person may have changed. Consult with an attorney about how to proceed.

Having a good estate plan is critical and some of these issues can be complex. Going it alone creates opportunities for missteps. Speak with your estate planning expert to ensure you have a proper estate plan in place so that your heirs are taken care of in the way you intend.

The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice. If you would like assistance with your individual investment strategy, please email witz@mediqus.com.

A list of potential estate planning mistakes you can help avoid with professional guidance.

Urology Times Money Matters: Estate Planning mistakes to avoid 

Cryptocurrency, nonfungible tokens, and marijuana stocks: Should I add alternative investments to my portfolio?

Investors often look for unique investments to boost their portfolio’s performance. As the world’s markets evolve and new technologies become essential parts of life, new investment opportunities tempt investors with the allure of getting in on “the next big thing” and earning quick and substantial returns. However, capitalizing on these types of investments requires an in-depth understanding of the product, the companies involved, and the market in which these companies operate. Substantial research is often needed to increase the probability of investment success, and even then, newly developing markets can come with substantial volatility and risk. Failure to understand the fundamentals driving these markets and the risk involved can lead to substantial losses.

Because of the risk involved with newly developing alternative investments, investors must ask themselves how much exposure they are willing to add to their portfolios. Should you put most of your retirement savings into an investment that is just as likely to drop significantly as it is to rise? Probably not. Are you just trying to have a little fun with a relatively small percentage of your investable assets? That is much easier to stomach. Overall, the decision should come down to your risk appetite and overall investment objectives.

The following alternative investments have been getting a lot of attention. (This is not an endorsement to buy or sell these investments.)

 Since 2012, when Colorado and Washington legalized marijuana, 13 other states have passed similar legislation. This has led to a wave of companies in the medical and recreational marijuana space going public, with some trading on major stock exchanges. These businesses range widely, including seed-to-sale producers, equipment distributors, and packaging and marketing companies. The success of legal marijuana on the state level has resulted in significant discussions of decriminalizing it at the federal level. Investors are attracted to the possibility of rapid expansion of an industry very much in its infancy.

 A more recent phenomena, an NFT is a digital asset that exists on a blockchain, which allows anyone to verify the asset’s authenticity and ownership. Each NFT has a unique digital signature and acts as a virtual deed, conveying ownership of a digital asset. Digital assets vary widely, but commonly purchased NFTs include images, video clips, gifs, and memes. As with cryptocurrencies, the free market determines the NTFs’ value, so investors can look to purchase an NFT with a value they perceive to be low and aim to sell it in the future for a higher amount. The concept is like buying and selling art, but instead of purchasing a physical piece, an investor buys a unique digital token that conveys ownership of the digital asset.

 There are thousands of cryptocurrencies, and the value of each is derived by the free market. This creates an investment opportunity to purchase a currency at a low perceived value and sell if the value has increased.

 Although the previous 3 alternative investments have been garnering a lot of attention, investors can explore other options such as private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts.

Alternative investments are not for the faint of heart. They often come with significant risk as investors try to determine their value on a local and global level. Investors need to carefully evaluate these opportunities before putting their money into them. Considerable research must be done to ensure a thorough understanding of the product, companies, and industry. Even more consideration must be given to the percentage of their portfolio an investor is willing to devote to these options. Although all investing carries risk of loss, a rule of thumb regarding alternative investments is to not put in more money than you are willing to lose.

Cryptocurrency, nonfungible tokens, and marijuana stocks: Should you add alternative investments to your portfolio?

Urology Times Money Matters: Alternative Investments

The markets seem to be pushing record highs. Are there adjustments I should be making to my portfolio?

As the COVID-19 vaccine rollout continues and another stimulus package has been approved, the equity markets have again pushed against all-time highs. These moments tend to elicit 2 very different responses from investors: euphoria and fear. Some investors view this as a sign to get more money in the market and hope the wave continues moving upward. Others see this as a sign that we are due for a pullback and start taking money off the table. Both of these actions are emotional responses. Investing with emotion is a risky endeavor and can lead to costly mistakes.

Removing emotion when investing is never easy. However, successful investing requires exactly this level of discipline. What can you can do during these moments when markets are pushing highs and there is uncertainty about their future direction?

Have an investment strategy and stick to it. 

Every investor should have an investment strategy printed out and pinned to their desk. An investment strategy keeps you disciplined. It will tell you when to buy, what types of investments to buy, and when it is acceptable to sell. An investment strategy allows you to block out the noise in the markets and media and focus on growing your wealth in a disciplined way.

 Often when markets are performing well, there are specific asset classes that drive that performance. This often leads to these categories becoming overweight compared with their target percentages because they have grown significantly. If this is true for your portfolio, now may be a good time to rebalance. Keeping your asset allocation in line with its target percentages is key to long-term investing. If your equity categories are overweight, the risk in your overall portfolio has increased, since these tend to be the most volatile asset classes.

There are 2 ways to rebalance. You can sell the category that is overweight and reallocate the proceeds to underweight categories such as bonds and real estate. This will add more downside protection in the event markets turn negative. However, the tax implications of selling must be considered. Rebalancing in tax-advantaged accounts such as 401(k)s and IRAs is easy to do; you can sell investments without having to worry about capital gains taxes. That is not the case with taxable accounts such as individual, joint, and trust accounts. Selling an investment with a significant gain in these accounts may result in owing a hefty capital gains tax. For these types of accounts, the second rebalancing strategy typically works best: add more money to the account and apply that money to the underweight categories.

Stockpile cash to invest if the market experiences a correction. 

 experience a correction. Knowing exactly when is impossible without a crystal ball. However, corrections provide excellent buying opportunities, as some investments may be trading at a discount. By having cash on hand, you can be prepared for when that moment comes.

Determine what amount you feel comfortable with having in reserves and eventually investing. When a market correction occurs, use this stockpile to invest in categories trading at a discount. You do not typically want to invest your entire cash reserve at once. If the markets continue to move downward, you will have gone all in before the investment hit bottom. To avoid this risk, use a dollar-cost averaging strategy to invest incrementally over a set period of time. Buying incrementally as investments go down will allow you to get in at good prices, but removes the risk of going all in at the wrong time.

When markets are pushing highs, everyone wants to know if they will keep going or if they are due for a pullback. No one can know for sure. The best thing you can do is have a plan in place so you know how to react regardless of which direction the markets go, remain well allocated and diversified across asset classes, and have cash available in case a buying opportunity arises.

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Sticking to your investment strategy can help avoid emotion-driven decisions.

Jeff Witz, CFP

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With the markets pushing record highs, how should you react?