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By focusing on short-term 'factor' trades like inflation, investors also risk missing out on longer-term buying opportunities, particularly higher quality companies that have been dragged down by the broader market sell-off, one expert says.Seth Wenig/The Associated Press

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Soaring inflation has sent investors scrambling to buy funds that aim to protect them against the market impact of higher costs. However, advisors are encouraged to keep their clients focused on longer-term investments, especially as inflation may have peaked and the trade appears to be shifting.

“I wouldn’t overhaul your investment plan to try to fight inflation right now,” says Ian Calvert, vice-president and principal, wealth planning, at HighView Financial Group in Oakville, Ont.

“You don’t want to be too reactionary to whatever the pain of the moment is.”

Data from the Investment Funds Institute of Canada (IFIC) show sales of long-term mutual funds have been falling since February and turned negative in April. There were $9.2-million in redemptions in October, the latest data available, reflecting a downward trend for most of the year.

Meanwhile, inflation-focused funds were on an upswing earlier this year, reaching $180-million in March before falling to $12-million in June and then going negative in July. There were $23-million in redemptions of inflation-focused funds in October, according to the IFIC data.

Mr. Calvert says portfolios should be built to withstand different market environments and various risks with some minor adjustments and rebalancing as needed, depending on the client and their investment needs.

For instance, while commodities tend to do better in periods of high inflation, it may not be a good idea to add more of this volatile asset class to a portfolio held by a retiree needing steady income over time.

Mr. Calvert argues that portfolios holding stocks and alternative investments, such as real estate, are already well-positioned to protect against inflation.

Also, he believes cash and guaranteed investment certificates (GICs) may be good for short-term saving needs, but they don’t work for long-term portfolios.

“If you were sitting in a portfolio of cash, savings, or GICs, that’s where you’re going to see the bigger risk of inflation,” Mr. Calvert says, noting that the interest rates for those products are below current inflation rates of 6.9 per cent in Canada in October and 7.7 per cent in the U.S.

Missing out on longer-term opportunities

Lyle Stein, president of Forvest Global Wealth Management Inc. in Toronto, cautions that short-term investments could leave portfolios exposed to other risks.

“There isn’t a holy grail of, ‘I’ll buy this, and I’ll be protected’ when looking at inflation-proofing your portfolio,” he says.

An example is using gold as a hedge. Gold is down 5 per cent this year, as of Nov. 22, which he notes is a better return than the broader bond or U.S. equity markets. iShares Core Canadian Universe Bond Index ETF XBB-T is down about 11 per cent, while the S&P 500 is down about 17 per cent year-to-date.

By focusing on short-term “factor” trades like inflation, he says investors also risk missing out on longer-term buying opportunities, particularly higher quality companies that have been dragged down by the broader market sell-off.

Mr. Stein says advisors should steer clients away from thinking about short-term trades and focus them instead on their long-term, individual investment goals.

“Portfolio strategy is much more important than portfolio tactics,” he says.

“Say to them, ‘Before we change the strategy, what are we trying to achieve?’ We get them to think about it in terms of comfort, contingency and the charity component of their portfolio versus stocks and bonds.”

The problem with trying to time the market

Dennis Mitchell, chief executive officer and chief investment officer at Starlight Capital in Toronto, adds that a market correction is a terrible time for most investors to pull out of long-term investments.

He points to studies showing that “time in the market, not timing the market,” generates the returns investors need to fund their retirement, buy a home or help send their kids or grandkids to university.

“Unless you’re really, really good at picking entry and exit points, it makes more sense to continue to build your investment portfolio over the long term with long-term assets and funds that are going to compound at a higher rate of return,” Mr. Mitchell says.

He adds it’s largely fear that drives investors to buy shorter-term investments and encourages them to stick to good-quality companies that can withstand market volatility over time.

“If you asked most investors if they thought that Apple, Nike, McDonald’s or Starbucks will be worth more 10 years from now ... most would say ‘yes,’” Mr. Mitchell says. “So, it’s not about their long-term outlook. It’s about their short-term ability to stomach volatility.”

He encourages advisors to work with investors to help manage their emotions when markets fall. Likewise, he says investors should stick with their advisors and weather the volatility.

“Managing people’s money is extremely important, and it’s a profession, and people should recognize that,” he says.

“If you’ve done the homework to find yourself a quality advisor who gives you great advice, you really should give them the benefit of the doubt at times like this and stay the course; adhere to your long-term investment strategy and discipline.”

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