Combat Fears Of Runaway Inflation
History is bound to repeat itself, and if that’s true, it’s really a question of when, not whether, the inflation rate will begin to edge up. What can you do to protect your investments in the event of this occurrence? Here are five possibilities.
1. Diversify your holdings. To offset inflation’s impact, investment returns must at least match the inflation rate, and that’s more likely with a well-diversified portfolio that spreads risks among several kinds of assets. One possible approach is to use equity-traded funds (ETFs) for this purpose. Typically, ETFs hold stocks and other assets reflecting the underlying net asset value (NAV) of the investment.
2. Ladder your bond investments. One reason inflation hurts bond prices is that it’s usually accompanied by an increase in interest rates that sends investors seeking newer issues with higher yields. That reduces demand for—and the value of—your existing holdings. A bond ladder, built with investments that mature at different times, can help you cope, because you can reinvest the proceeds from maturing issues in new bonds that pay you more.
3. Consider gold. To judge by recent movements in the price of gold, long considered a hedge against higher consumer prices, you’d think a steep rise in inflation was just around the corner. Yet while gold, historically, has tended to hold its value through good times and bad, the correlation between gold and inflation isn’t an exact science. Though allocating a portion of your portfolio to the precious metal may make sense, current prices are very high and could fall if investor sentiment shifts.
4. Add to your real estate holdings. Property values, too, may increase with inflation, and after the historic slump of the past few years, real estate prices may be beginning to rebound. For individual investors, the best way to invest in this asset class is usually to buy real estate investment trusts (REITS), which trade on stock exchanges and generally hold commercial properties. But here, too, moderation is warranted.
5. Look at Treasury Inflation-Protection Securities (TIPs). Unlike regular Treasury bonds, which lose value when inflation rises, TIPs adjust the value of their principal upward in step with increases in the Consumer Price Index (CPI). That means higher income. But there’s a potential downside, too. If the CPI declines, payments decrease (although the original face amount is paid at maturity).
Bottom line: There’s no substitute for expert advice. We constantly monitor economic conditions and financial markets to make sure your portfolio is well positioned for whatever comes. If you’d like to discuss the outlook for inflation and what it might mean for your investments, please give us a call.
Investments designed to offer protection against inflation also hold inherent risks. There are no guarantees that any investment will produce a positive return, and it could actually result in a loss of principal, regardless of the prevailing economic conditions. Consider all the relevant factors, including your financial situation, your time horizon, and your personal risk tolerance before investing.
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