401(k) Specialist Issue 3 - 2022 - 39

401(k) INVESTMENT INSIGHT
While stock prices will reflect company-specific
changes in dividend policy, corporate
governance, or earnings potential,
there's no reason to expect this to impact
the associated commodity.
of TIPS changes based on the inflation
rate, and so the rate of return includes the
adjusted principal. This means that investors
get paid more as inflation rises.
Despite the inflation protection, an
Real Estate Investments
Real estate investments, including offices,
apartment buildings, warehouses, retail
centers, medical facilities, data centers,
cell towers, infrastructure, and hotels, as a
class, have traditionally had the characteristic
of performing well in an inflationary
environment. The assets have several
benefits during periods of high inflation,
including appreciation as property values
keep pace with inflation, fewer real estate
development projects due to rising labor,
material, machinery, and other costs and
increasing rents.
Implementation into a defined contribution
plan continues to be a challenge for
this asset class. Like other inflation-fighting
asset classes, direct access to real
estate-owning actual properties-is the
most effective and least volatile. Still, in
the daily-traded, liquid environment of defined
contribution plans, direct ownership
is difficult.
Defined contribution plans may
implement real estate access through
investments like Real Estate Investment
Trust (REIT) funds. REITs are companies
that own and operate income-producing
real estate. However, there are drawbacks.
As stocks of companies, not direct real
estate, the performance of REITs tends
to be much more volatile than direct real
estate. REITs are also sensitive to rising
interest rates.
REITs also have a high correlation to the
broad stock market. From 1972 to 2018,
REITs have had a slightly higher average total
annual return than the U.S. Total Stock
Troy Jensen
" We are going
through a period
when the investment
environment has
changed, and
expectations are that
returns on multiasset
portfolios are
likely to be lower
than they have been
in the past. "
Market (11.4% vs. 10.3%) and a higher average
standard deviation (16.9% vs. 15.5%).
TIPS
Treasury inflation-protected securities
(TIPS), a type of U.S. Treasury bond, are
indexed to inflation to protect investors
from its impact. TIPS adjust the amount
investors receive based on changes in the
consumer price index. Twice a year, TIPS
payout at a fixed rate. The principal value
overall rise in interest rates will still feed
through to the TIPS market, putting
downward pressure on prices. In addition
to changing expectations for inflation, the
Federal Reserve's quantitative easing pullback
removes a huge source of demand
that had pushed yields down.
We are going through a period when the
investment environment has changed, and
expectations are that returns on multi-asset
portfolios are likely to be lower than
they have been in the past.
Investors in the workforce have greater
choices. The first-and likely least attractive-is
to save more. Investors can save
more or delay retirement, which in effect,
will decrease the level of wealth required in
retirement.
The second option is to focus on increasing
exposure to growth-seeking assets through
more equity or higher-returning segments of
the fixed income market. This approach can
boost long-term portfolio return potential by
increasing the level of market risk within a
portfolio either through adjusting the balance
of assets between equity and fixed income or
adjusting within asset classes.
A third option to address lower return
expectations is adjusting retirement
spending. Research on retirees' spending
habits reveals that they tend to adjust their
spending to their income.
Still, getting investments right is critical.
Moving into a period of lower expectations
for returns reduces the margin for error.
Gordon Tewell, CFA, CPC, ERPA, QKC, and Troy
Jensen, APA, QKA, are Principals with Denver,
Colo.-based Innovest Portfolio Solutions LLC.
ISSUE 3 2022 | 401kSpecialist.com
39
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401(k) Specialist Issue 3 - 2022

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