Fri, 15 Jul 2011
Planner Mark Balasa of Balasa Dinverno Foltz says he's repositioning clients' fixed-income allocations to be prepared for potentially higher intermediate-term inflation.
Jason Stipp: I'm Jason Stipp for Morningstar.
As part of Morningstar.com's inflation report, we are checking in today with noted financial planner Mark Balasa of Balasa Dinverno Foltz, to get his take on where we are in inflation today and some of the tools he may be using to keep his client portfolios ahead of inflation.
Mark, thanks so much for calling in today.
Mark Balasa: My pleasure.
Stipp: First question for you is a biggie I want to start big, and talk about your overall forecast for inflation. What do you bake in as you are thinking about what you need to overcome on the inflation front when you are planning you clients' portfolios?
Balasa: It’s obviously a big question in a lot of people’s minds because of the concerns around your purchasing power. So in the planning process for us, it’s essentially two fronts; one is the projection side in terms of the cash flow projections for clients, and then of course as you said the portfolio construction.
If I touch on the portfolio construction side of things, in our perspective there is the short-term inflation concerned and then the long-term inflation concern. On the short-term side of things, as many people expect, inflation for the next six months or a year we hear over and over is going to be fairly muted because of the anemic U.S. economy. That being said, most people on the food and energy side, of course, they haven’t been experiencing that. But you look at portfolio design we are assuming modest inflation in the short term. But in immediate term, of course, that concern goes up because of our government’s borrowing and spending and what that might mean for inflation here in the U.S. So in doing the portfolio construction, we are trying to reposition the bond side, the fixed-income side of the portfolio, to be more sensitive to that intermediate need, as well as on the stock side.
Stipp: Mark, do you use any specific percentage targets at a macro level or do you sort of look case-by-case at your clients. What I'm asking is, do you have a broad outlook for the percentage we might see inflation over the longer term?
Balasa: For us, the longer-term averages, if you go back to the 1920s to the present, has averaged about 3.1%. So when we're running long-term projections over the balance of someone’s life or doing a portfolio analysis, we tend to use the historical average--actually, not entirely, we typically use 3.25%. That being said, the intermediate term, let’s say one to five years, could be substantially higher than that--time will tell. But in terms of our macro view, that’s how we approach it.
Stipp: A question for you about some adjustments that you might make depending on the client situation. So although that 3% or so may be the average, we have seen pretty hefty inflation in health care for, example, and in college education cost--two big areas that a lot of folks do need financial plans for. How do you adjust for the higher inflation we have seen in those areas?
Balasa: Again a very good question. For us we've got the luxury of being able to be very specific when we run and model projections, cash flow projections, for our clients. So, for example, on the education side, we typically use 6% or 7% as a inflation rate, when we run the projection specifically on education funding for our clients.
On the retirement/health-care side of things, that’s more difficult, because that tends to be quite a few years out unless someone is already in retirement, and again that’s a difficult thing to model, but what we tend to do is leave a larger buffer in our expected need, assuming that the health-care costs are going to be higher, but we just tend to use our same inflation rate that we do for the rest of projections, for health care, again, because there are so many unknowns in the future.
Stipp: Mark do you folks look at long-term care insurance as one option for certain types of investors?
Balasa: We sure do. Long-term care can be a pretty important need and a great tool for many families. Part of the difficulty with long-term care insurance is, of course, the cost. If someone has a lot of wealth, even a fair amount of wealth, in many cases they can self insure, and they don’t need at least a very elaborate health-care policy--maybe more of a basic one just to provide a floor. But conversely, they are in the best position to afford [long-term care insurance], and the people that typically need it the most are the ones that are most challenged to pay for it. So, again, trying to strike a balance between what the family can self-insure long-term and what they need to buy is part of the process in evaluating how much long-term care insurance to use.