A comprehensive financial plan can beat inflation if managed proactively to hedge against it through various strategies. To manage your portfolio risk properly, understand inflation’s impact on stocks/bonds and what sectors to monitor/avoid. Let’s explore what investments do well in an unstable economy versus normal conditions.
What’s required to maintain the performance of any investment portfolio and ultimately maximize wealth? This requires time, knowledge, research, and commitment to succeed—we are here to make sure you don’t get caught up in the market's madness.
A Libertyville, IL financial advisor at Prism is experienced in managing wealth in all market conditions.
This article provides awareness and inflation hedge insight to help individuals, families, and business owners protect their nest eggs.
What is Inflation and How Does it Affect Your Portfolio?
Prism Planning Partners helps people understand their purchasing power, the effects of inflation, and position their portfolios for these times.
During times of high inflation, investors should:
- Have a financial plan that includes putting their money in assets that tend to outperform the market
- Have a well-diversified portfolio
- Increase certain types of securities (examples below)
What is Inflation?
The rate of inflation constitutes the rate that an investment’s real value is eroded and the loss in purchasing power/spending over time. Inflation specifies how much of a return investments require in order to maintain a certain standard of living.
Inflation hit a 40-year high of 8.5% due to the war, rent hikes, existing pent-up demand, insufficient supply, and a scarcity of workers (read more on oil prices below).
How Inflation Impacts Your Portfolio
Rising inflation has substantial economic impacts on your pocketbook and investments. Since the world operates differently in times of crisis, investments that perform well in good times are not ideal for hard times.
A volatile market especially requires portfolio investment management and active rebalancing (more below on how often to review your portfolio).
How Can You Ensure That Your Portfolio Remains Relevant in a Changing Economy?
Consider what sources you watch, listen to or read to stay informed on the market. Do you even have the time or desire for such activities?
Find an even keel for living your preferred lifestyle while ensuring your portfolio remains relevant by working with a CERTIFIED FINANCIAL PLANNER™️ Professional near you.
An understanding of how inflation impacts your portfolio and a review of your comprehensive financial plan will help guide you. Do you have a financial advisory firm on your side to keep your portfolio protected in extreme and normal market conditions?
For example: What kind of bonds can protect your portfolio from inflation?
Bonds are often included in portfolios because they serve as fixed income instruments similar to maintaining cash in a savings account/CD. This keeps your money accessible and safe. Companies and individuals use them to save/maximize income, preserve principal, or for diversifying a portfolio and managing interest rate risk.
As inflation goes up leading to higher interest rates, long-term bonds suffer losses while short-term bonds are more resilient. For this reason, it’s wise to stick with short to intermediate-term bonds versus long-term. As bonds mature, investors can always reinvest short-term bonds at higher interest rates.
What Investments are Best Suited for Inflationary Environments?
Diversification works whether the economy is experiencing stable inflation or rising inflation. Consider arming your portfolio with these inflation hedges. As mentioned above, short-term bonds are well-crafted for unpredictable markets.
To help balance your bond portfolio or fixed income (since they are indexed to inflation), consider adding Treasury Inflation Protected Securities (TIPS) to your portfolio. These government bonds mirror inflation’s rise and fall. So, when it rises, the interest rate payout does too (and conversely with deflation).
As the values of properties tend to increase during times of inflation, real estate serves as a great investment for years. The benefits of homeownership or rental income are substantial during trying times.
Commodities and raw materials like gold and other metals, oil, and agricultural products usually increase alongside inflation.
Stocks can serve as a long-term inflation hedge; however, they can suffer if inflation spikes in the short term. If current inflation issues are transitory, don’t make drastic changes that may hurt your portfolio performance if inflation drops.
As an example related to current geopolitics gas prices have soared since February at almost 20%. How does this relate to stock investments? An increase in oil prices means higher share prices for oil stocks.
Other commodity prices that rocketed include coal, natural gas, and building materials – creating much potential for various energy sector stocks. Stocks that are highly correlated to oil prices have generally been great investments so far this year. However, many energy investors felt the blow when crude prices collapsed in early 2020.
Here are ten of the best stocks as of Q1 performance per U.S. News:
- NexTier Oilfield Solutions Inc. (NEX)
- Peabody Energy Corp. (BTU)
- RPC Inc. (RES)
- Alpha Metallurgical Resources Inc. (AMR)
- Kosmos Energy Ltd. (KOS)
- BRC Inc. (BRCC)
- Golar LNG Ltd. (GLNG)
- US Silica Holdings Inc. (SLCA)
- LSB Industries Inc. (LXU)
- Occidental Petroleum Corp. (ticker: OXY)
Discuss more investment alternatives with our team at Prism.
How Often Should You Review Your Portfolio to Ensure it Meets Your Goals?
Know this: you must be able and willing to sacrifice liquidity and take on some additional investment risk during inflation. Here are a few more things to consider:
- Tax and investment implications associated with TIPS
- Your risk tolerance for commodities and equities
- The implications of giving up liquidity associated with alternative investments
Investors who check their performance once a day could become problematic. Doing so can result in feeling like their investments are performing worse than they are. This can result in incorrect investing for long-term success.
Here are some helpful questions to ask an advisor during inflation:
- Should I adjust my portfolio?
- What does historical data show?
- What hedges against inflation are right for me?
As a rule of thumb, investors should review their portfolio performance every two to three months. This can ensure there are no dramatic changes in either direction. A portfolio that doubles the market return in a short period may have more embedded risk than originally suspected.
However, the superseding answer should come from your CERTIFIED FINANCIAL PLANNER™️ Professional who understands your risk tolerance, time horizon, and financial situation.
Use an inflation surge to review your comprehensive financial plan and overall investment performance. Discuss allocation with your trustworthy financial advisor to ensure it aligns with your goals. Since most of us are still long-term investors, avoid making drastic changes to your portfolio based on current market conditions.
If you don’t yet have a comprehensive financial plan, get started making one with this checklist. Again, the best way to approach managing your wealth is to develop a comprehensive financial plan with a fiduciary financial advisor.
Prism Planning Partners is here to learn what true wealth means for you and your family. We serve families, individuals, and business owners at every stage of life in Libertyville, IL, and Lake County, IL.
Contact us today to get started strategizing for your current and future personal financial life—this is what we do best. Let’s work together to create the retirement you desire and have worked so hard to achieve. For a business owner, use this retirement planning guide.
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