Forecasting Inflation & Volatility

by Mike Lester

Aug 30, 2021

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Speaker 1 (00:02):

Welcome to the Retirement Wealth podcast. Our goal is to help those retired or soon to be retired investors, make more informed financial decisions and live an enjoyable retirement. Our host, Mike Lester is the founder and CEO of Talon Wealth Management. Mike is an Investment Advisor Representative of Retirement Wealth Advisors, Inc., an SEC registered investment advisor. Thanks for joining us today, and let’s get started.

Kristen (00:31):

Consumer prices jumped more than expected in May, but is the surge in inflation, temporary? Russ Koesterich of BlackRock tells CNBC.

Russ Koesterich (00:41):

I think we have a few more months left of scares or at least some uncertainty and probably a bit more than that. There’s a lot of talk about inflation being transitory. I think that’s right, but we have to define what transitory means. I don’t think transitory is you’ve got another month or two. It’s very likely given the base effects, even what we’re seeing in wages, given what we’re seeing in supply bottlenecks, that the upside risk on these inflation prints is going to last several quarters, not just a couple of months. So I think that its something we’re going to be focusing on probably for the remainder of the year and into 2022.

Kristen (01:19):

As a regular person, not in the financial world, that worries me for our day to day expenses and the investment accounts for myself and our listeners.

Mike Lester (01:28):

Well Kristen, I’m concerned too, but also this whole idea of inflation, I think there’s a difference between homes costing more. We know homes are costing more. There’s difference between certain things costing more like gas, we’re seeing it, and I have some stories about things like boats and cars and all of this, I’ll go over in a minute. But as an investment advisor managing money for clients, inflation, the question is, is it temporary, or is it long-term? And so when he says a few quarters or through the end of the year, that’s temporary. That’s something that’s happening now, and it’s perhaps not real inflation, it might seem like real inflation, but it’s not real inflation.

Mike Lester (02:03):

Where it becomes a problem is if the effect of the government printing all of this money continues to devalue the dollar and all of the spending continues to increase the price of goods, then we wind up with inflation. My concern, and I think we can see this with the fed and the reports that are coming out, they’re not overly concerned about inflation because they aren’t raising rates. And one of the things that I think is pretty interesting is, I think if they believed the economy was going to be really, really robust a year from now or two years from now or three years from now, they would have more incentive to raise interest rates because the economy could handle that. And the fact that they’re not raising interest rates and they’re continuing to practice something called, monetary easing, which is when you make money easier to get by having low interest rates on it, encouraging businesses to borrow money in order to grow their business.

Mike Lester (02:56):

It’s not an indication that they believe things are likely to be in the future. So we have to really separate something that may be very temporary from something that might be long-term. So I’ll give a couple of examples here. First one I can think of, I’ve had this conversation with a lot of people, is just the cost to build a home right now, versus what the cost to build a home a year ago is way higher. In fact, home builders not only are they finding it hard to source the lumber that would be required to do it, the cost of that lumber would be exorbitant. And so the price of a home is exorbitant.

Kristen (03:28):

Mike, My neighbor at a home we have in our favorite football town that I will not say because I don’t want to cause controversy here on the radio, the neighbor there is a handyman. He said that he was going to rebuild a deck for a client. If he had done it a year ago, would’ve been $4,000 in lumber. It’s 11 now. I can’t imagine an entire home.

Mike Lester (03:51):

Make no mistake, if you’re willing to be patient, so all the companies out there that manufacturer lumber are going just nuts right now, manufacturing as much lumber as they possibly can because it’s extremely profitable for them right now. But eventually there’s more lumber than there are clients and now we have a surplus of lumber and it comes back down, right? So that’s what I mean by a temporary effect. Kristen, I was telling you before the show, just recently, our kids just got out of school. So we went on our summer vacation. And so on our summer vacation, we’re typically boating. So I’m talking to the guys at the marina there and going through some things and he asked me, “Hey, listen, would you be interested in selling your boat?” And I said, “Well, I haven’t really thought about it.” Well, then he starts explaining to me that I can basically sell my boat now for more than I paid for it 10 years ago. And I’m going, “Sold.”

Mike Lester (04:43):

If somebody’s crazy enough to pay me today, more than I paid for this boat 10 years ago, that’s just a bad investment on their part. As a matter of fact, I’ve got another boat, they can have two on top of that, and these are these aren’t yachts or anything, Kristen. There’s a boat for skiing, and then there’s a boat for fishing. It’s not the same boat, but listen, I’ll sell at the high, which is now. When it comes to if you got boats in particular… Houses are a little more difficult, you have to have a place to live. But if you’re willing to sell your home and go move into something temporary, like rent another house or get an apartment or something like that, probably not a bad investment decision. My belief personally, and you know what, two years from now, if I’m wrong, call me up and call me out on it [crosstalk 00:05:25].

Kristen (05:26):

Ask me to borrow my boat that doesn’t exist.

Mike Lester (05:27):

You’re going to borrow my boat that doesn’t exist or whatever. But I would bet that if go ahead and sell it now, buy it back a year or two years from now, you’ll be very happy you did, so as long as you can do with it. That’s my plan, personal story. So this stuff can be temporary, Kristen, but whether it’s my plan to sell a boat now and buy one back later or whether it’s a financial plan, do I retire now? Do I retire later? Can I afford to retire now, or should I wait until a little bit later? What about inflation? What about taxes? Where’s my income going to come from?

Kristen (05:56):

Connect and find out more at I cannot believe we are rolling in the summer of 2021, but I am happy that we are. But it also looks like volatility may be heating up just as much as the weather PNC Financial Chief Investment Officer, Amanda Agati tells CNBC.

Amanda Agati (06:17):

We definitely think that a high volatility regime is likely to dominate the near term market outlook. We’ve certainly seen that over the course of 2021 so far. And let me just say, we’re not expecting record breaking high volatility like we saw over the course of 2020. But when you look at metrics like the VIX, when you look at the MOVE index as a measure of volatility for fixed income markets, both are sitting at fairly elevated levels.

Kristen (06:46):

The VIX and the MOVE index, most of us don’t know what that means, listening today. I’m one of those people, but I will say this, what she said that I did understand didn’t sound great. Do we need to be positioning our portfolios for more volatility? Do we need to be paying more attention to these VIX and MOVE indexes?

Mike Lester (07:07):

If we’re not in financial services, then VIX or MOVE don’t mean a lot, but we all know what volatility is. And so when I’d say volatility can be good volatility, so sort of volatile to the upside. It can be bad volatility, which is volatility to the downside, or it can be just all over the place. But volatility tends to make people nervous. A lot of times when I’m sitting at the office and we’re just working through financial planning and explaining to people the difference between a portfolio that historically is averaged, let’s say 9% per year, that has a certain level of volatility. And then another portfolio that historically has averaged 9% per year that has half the volatility, volatility is also another way of talking about risk. If you ask somebody which one would you rather have, the one averaging 9 with twice the volatility or the one averaging 9 with half the volatility? Well half the volatility makes sense, right?

Mike Lester (07:59):

So volatility is really not our friend. We need a predictable return moving forward. And regardless of what a return is on a portfolio, what’s interesting about investing in the stock market is we know that it’s not always up, it’s not always down. People who have a hang in there approach. They settle for an average rate of return based on all of that volatility. And what we’re doing is trying to pull that volatility out through active management. So when we sit down with our clients and we’re putting together annual reviews and going over the portfolios and managing their money, our goal is to get a return higher than what the equivalent market did. So a moderate portfolio, this may be 60% stocks and 40% fixed investments. If that portfolio and a hang in there approach had averaged, let’s say 8% over the past 10 years or 15 years or 20 years, if we could put together a portfolio that was still 60% stocks and 40% fixed investments.

Mike Lester (08:58):

But if net of the fees, it had the same or higher average rate of return, but a lot less volatility, maybe half the risk or less, than in that situation, we’re providing value. And there’s really no other way to say it, Kristen, than to sit down with individuals and take a look at their current portfolio, go ahead and project what they’re likely to do moving forward. Most people realize that their 401k or their IRA is not actively managed. They realize that if they’re working with a financial advisor that isn’t an active money manager, it’s not actively managed. So if you can find a way to employ active management on your portfolio, and if the fee for that active management is in some ways, it’s not that it’s irrelevant, but it’s not as relevant because net of the fee, you’re getting a higher average rate of return.

Mike Lester (09:44):

And if net of the fee, you have not only a higher average rate of return, but less risk, then for a lot of people that just make sense. I say, “Well, listen, if you can manage my money and I don’t have to worry about the ups and downs, because you’re going to worry about it for me. And if I understand your fees and how they work, but if net of those fees, I’m getting a higher average rate of return. And if net of those fees, I’m also taking less risk to get those returns, I’m going to be more confident in my retirement. And I’m going to understand how things work better. I’m going to have somebody I can call up when I have a question and talk to them personally. And when things change or I come in for my annual review or semi-annual review, we can talk through it.”

Mike Lester (10:18):

That’s basically what we do, on a day-to-day basis, Kristen. So, things like volatility, yeah, they’re going to be higher at some points, they’re going to be lower at some points. I think a lot of people are scared right now because of everything that’s going on. I’m scared too. We just got to talking about it’s just really weird out there right now, for reasons I mentioned earlier in the program, take a close look at your portfolio. Whether you have us take a close look at it for you, or you have somebody else take a close look at it for you, just make sure you’re being active, because I think it’s going to be really, really important and hopefully not in the next six months, but probably within the next year to 18 months.

Kristen (10:50):

Active portfolio management, that is key when you’re near or in return.

Speaker 1 (10:55):

If you would like to have a comprehensive financial plan and an analysis of your current portfolio, go ahead and visit our website at, and we can do that for you complimentary. Thanks so much for joining us on today’s show. Be sure to subscribe to our podcast, visit our website at for more free retirement planning and investment resources. Thanks for tuning into today’s show, and we’ll see you next time on the Retirement Wealth podcast. Exposure to ideas and financial vehicles discussed should not be considered investment advice or recommendation to buy or sell any financial vehicle. This information should not be considered tax or legal advice. Individuals should consult with professionals specializing in the fields of tax, legal, accounting or investments, regarding the applicability of this information to their situation. Past performance is not a guarantee of future results. Investments may fluctuate and when redeemed, maybe worth more or less than originally invested.

Mike Lester

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Forecasting Inflation & Volatility