Inflation and Investments – How to Safeguard Your Portfolio
Inflation can quickly diminish the purchasing power of your savings and investments, but inflation is an integral part of an efficient economy and there are steps you can take to safeguard against its adverse effects.
An investment strategy designed specifically for your goals and risk tolerance can help mitigate inflation’s effects on your finances and protect your goals from its damaging effects. Contact us now to see how we can assist.
1. Diversify Your Assets
Diversifying your assets to combat inflation is the key to safeguarding your portfolio. This involves including stocks, bonds and alternative investments with returns likely to surpass inflation.
These include tangible investments such as gold, silver, and agricultural commodities that hold their value or even appreciate during periods of inflation; real estate investment trusts (REITs), with rent income likely to keep pace with inflation; and energy companies offering variable dividends based on certain metrics like free cash flow or revenue.
Holding too much cash can reduce your purchasing power by reducing interest payments and decreasing how much money can be invested. Furthermore, investing in funds that are highly correlated may not provide sufficient protection from inflation; as a result, many investors turn to pooled investments such as mutual or exchange-traded funds for protection.
2. Rebalance Your Portfolio Regularly
Rebalancing your portfolio is a way to guard against inflation. This process involves selling some investments to fund purchases of more expensive investments that have increased in value over time, helping maintain your risk level while working towards long-term financial goals.
Real estate, commodities, stocks with pricing power and Treasury Inflation-Protected Securities (TIPS) can all be excellent inflation-resistant investments that perform well during periods of inflationary stress. Retirees may also find comfort from inflation-adjusted income through Social Security or annuities with cost-of-living adjustments.
Limit the effects of inflation by cutting spending habits and eliminating unnecessary debt. A budgeting app may also prove helpful in tracking expenses and managing spending habits more easily. Finally, using tax-efficient strategies such as loss harvesting and maxing contributions to tax-deferred accounts may provide your portfolio with additional protection from inflation’s effects.
3. Manage Your Taxes
An investment portfolio that’s diverse enough can provide the protection against inflation you need. Investments that often do well during times of inflation include real estate, stocks of companies with pricing power, Treasury Inflation-Protected Securities (TIPS), and commodities like gold. Cash investments like T-Bills may provide modest returns but may actually experience loss in purchasing power due to inflation.
Wells Fargo recently conducted a study that confirmed long-term stock returns have outshone inflation every year since 2000. Certain sectors may be better at withstanding inflation, such as small cap stocks with high dividend growth or financial services, energy, or emerging market companies.
Direct ownership of rental properties may require more involvement for some investors, so exchange-traded funds or mutual funds that specialize in real estate could provide an easier way to add this asset class to a diversified portfolio. Making mindful, deliberate decisions during volatile times as well as managing your taxes effectively are both excellent ways of combatting inflation.
4. Maintain an Emergency Fund
An inflation-resistant investment portfolio requires understanding your personal risk tolerance, timeline to retirement and current financial situation. A qualified financial advisor can assist in creating an asset allocation that suits your goals; SmartAsset’s free tool connects you with pre-vetted advisors in your area that you can interview at no cost in order to find one who meets this criteria.
Emergency funds can provide protection from rising inflation. By having money saved away for emergencies, it can reduce the need to take out loans with higher interest rates or credit. To best utilize an emergency account’s funds it is advisable to create a review process prior to withdrawing any money.
Real estate, stocks of companies with strong pricing power and commodities such as gold are all investments that may provide protection from inflation; however, investors should pay attention to its causes; for instance, strategies designed to counter rising oil prices might not work so effectively if inflation stems from skyrocketing shelter costs instead.
