How to Protect Your Portfolio During Rising Inflation
The country is opening again after the severe disruptions we saw over the last year. But, the stimulus of the past year, coupled with the growing economy and some of the shortages we have experienced are causing rising prices. In fact, the labor department is reporting the fastest pace of inflation since 2008. So, what is inflation, and how you can help protect your portfolio?
First, let’s go over the differences between reflation and inflation. Reflation is more akin to what we are seeing now –price increases due to the reopening and growing economy, as the economy works its way back to full employment. Inflation is generally increasing prices in a more stable situation – when an economy is at full capacity, and unemployment is generally low.
To most of us, higher prices affect us negatively, regardless of the root cause. Shopkick, a retail marketing app, surveyed 19,000 consumers to see what their experience with inflation was. Of those, 86% have noticed increased prices, and 83% plan to tighten their belts because of it.
Inflation is a problem because it eats at the value of your retirement savings. Average inflation is about 3.23% according to tradingeconomics.com. So, even in optimal economic conditions, you’re losing 3% or more of your savings most years. But there are some strategies you can use to help protect yourself, your family, and your hard-earned money.
First, there are certain asset classes that are historically more resistant to inflation, like real estate. If you do not want to own property yourself, there are Real Estate Investment Trusts, ETFs, and other strategies that act as a good inflation hedge. Commodities are also often considered a classic inflation hedge because Inflation means rising prices. Commodity prices usually rise the most, as it takes a long time to build new capacity to satisfy the demand.
Second, Treasury Inflation Protected Securities, or TIPS are another classic option because they are designed to increase in value to help keep up with inflation.
Finally, it may seem counterintuitive, but continuing to invest in the stock market is generally a good hedge against inflation because the market tends to outpace inflation. Stocks with low pricing power can be especially effective – even though this is the exact opposite of what investors usually look for. Companies with in-demand products can raise prices any time, and attract exceptional valuations. But when prices are rising everywhere, the weaker, less popular companies can also price more aggressively, and pricing power becomes less important. In such an environment cheap, or “value,” stocks in fiercely competitive sectors such as telecommunications or cable TV become more attractive.
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