How do I protect my investments from inflation?
Even if your investments increase in value, inflation can erode their value.
There are steps investors can take to hedge against the direct impact of inflation or to earn returns that exceed inflation over time. But it can be difficult to predict.
“In the real world, post-inflation returns are the only thing investors care about,” said Robinson Crawford, an investment adviser at Montebello Avenue.
Even if inflation is rising more slowly than analysts predict, it’s still best to be prepared.
Financial advisors say one of the most stable inflation hedges is a properly diversified stock portfolio.
Sean C. Gillespie, a financial planner at Redeployment Wealth Strategies, said stocks have historically grown faster than inflation, and despite the inherent volatility in a stock portfolio, “ Stocks are a long-term asset to your plan, just like inflation is a long-term asset.” Threat. ”
To figure out where to put money in the stock market, investors can pursue a total return strategy that relies on stocks to provide positive inflation-adjusted returns over the long term.
“Of course, investors must accept more risk when investing in stocks and endure periods when returns fail to outpace inflation,” said Dejan Ilijevski, investment advisor at Sabela Capital Markets. “While some investors may believe that rising inflation will lead to lower stock performance, But U.S. market history shows that nominal annual returns on stocks have nothing to do with inflation.”
Gold and commodities
Gold and commodities have been investors’ standard safe havens against inflation.
“Traditionally, commodities and gold have been great inflation hedges,” said Stephanie Bucko, CFA and co-founder of Mana Financial Life Design. But she said it was important to consider the strength of the dollar as part of the equation.
“We like oil exposure because it affects our customers on a day-to-day basis relative to gas prices, but it also provides a good inflation hedge,” Bucko said. We saw this in the 1970s, he added. At one point, inflation doubled and nominal inflation rose. Oil prices soared.
But for the uninitiated, commodity markets can be complex and risky.
“Commodities are more volatile than stocks, which means adding commodities to a portfolio may increase real return volatility, negating the benefits of hedging,” Ilievsky said.
Real estate is the ultimate hard asset in times of inflation because it appreciates in value. Financial advisors advise investors to find a place for real estate in their investment portfolios.
Investors can gain access to real estate investments by directly owning commercial or residential properties, or by investing in real estate investment trusts (REITs).
Real estate is a sound investment, Crawford said. “But I would caution that if you don’t raise real estate rents, you can’t fight inflation.”
Short-Term Bonds and TIPS
Short-term bonds and Treasury Inflation-Protected Securities (TIPS) are investments that hedge against inflation.
“Hedges look for asset classes that tend to be positively correlated with inflation,” Ilievsky said.
For example, he said, shorter maturities allow bondholders to roll over principal more frequently and at higher interest rates. This helps inflation-sensitive investors keep pace with short-term inflation.
Likewise, government-issued TIPS are fixed-income securities that hedge against inflation. Their principles are adjusted to reflect changes in the Consumer Price Index. When CPI rises, principal increases, causing interest payments to increase.
“TIPS definitely deserve a place in the portfolios of U.S. investors, especially those with large bond holdings,” Crawford said. “The main problem is that their value increases with the Consumer Price Index, which many believe is not an accurate indicator of inflation.”