How can I protect my investments from inflation?


How can I protect my investments against inflation?

Even if your investments increase in value, inflation can eat away at their value.

There are things investors can do to hedge the immediate effects of inflation or to earn a return that beats inflation over time. But it can be difficult to predict.

“Inflation-adjusted returns are all that matters to investors in the real world,” says Robinson Crawford, an investment adviser at Montebello Avenue.

Although inflation is currently rising more slowly than analysts had predicted, it is better to be prepared.

Financial advisors say one of the most consistent hedges against inflation is a properly diversified stock portfolio.

Stocks have historically outperformed inflation, says Sean C. Gillespie, a financial planner at Redeployment Wealth Strategies, who says that while there is inherent volatility in a stock portfolio, “stocks are a long-term asset to your plan, just as inflation is a long-term threat.” .

To find out where to put your money in the stock market, investors can look for a total return strategy that relies on stocks to deliver positive inflation-adjusted returns over the long term.

“Of course, investors have to accept more risk when investing in stocks and endure periods when returns have not exceeded inflation,” says Dejan Ilijevski, investment advisor at Sabela Capital Markets. “While some investors may assume that higher inflation leads to lower stock performance, US market history shows that annual nominal stock returns are unrelated to inflation.”

Gold and commodities have been standard inflation havens for investors.

“Traditionally commodities and gold have been good inflation hedges,” says Stephanie Bucko, financial analyst and co-founder of Mana Financial Life Design. But he says it’s important to consider the strength of the US dollar as part of this equation.

“We like exposure to oil, which affects our clients every day with gas prices, but it also provides a good hedge against inflation,” Bucko says, adding that in the 1970s we saw nominal and double inflation. oil prices rose.

But commodity markets, for the uninitiated, can be complex and dangerous.

“Commodities are more volatile than stocks, which means that adding commodities to a portfolio can increase the volatility of the actual return, offsetting the benefits of hedging,” says Ilijevski.

Real estate is the last hard asset in times of inflation as it will see price appreciation. Financial advisors suggest that investors find a place for real estate in a portfolio.

Investors can gain exposure to real estate by directly owning commercial or residential property, or by investing in real estate investment trusts (REITs).

It’s a good real estate investment, says Crawford. “But I would caution that if you’re not increasing the rent on your property, you’re not fighting inflation.”

Short-term bonds and Treasury Inflation-Protected Securities (TIPS) are investments that hedge against inflation.

“Hedging looks for asset classes that tend to correlate positively with inflation,” says Ilijevski.

For example, he says, shorter maturities allow bondholders to repay principal more often at higher interest rates. This helps inflation-sensitive investors brace against short-term inflation.

Similarly, government-issued TIPS are also a fixed-income security hedge against inflation. Their principle is adjusted to reflect changes in the Consumer Price Index. When the CPI rises, the principle increases, resulting in higher interest payments.

“ADVICE is absolutely worth adding to the portfolio of US investors, especially those with significant bond holdings,” says Crawford. “The main problem is that they increase in value along with the CPI, which many would argue is not an accurate measure of inflation.”