Inflation Watch 2021: 5 Ways to Protect Your Investment Portfolio Against Rising Prices

AAs an investor, it is easy to understand that you have to worry about inflation. Knowing what to do about it can be much more difficult.

On Wednesday, the U.S. Bureau of Labor Statistics said the Consumer Price Index, a measure of the costs of goods and services ranging from food and gas to housing and more, had risen by 6 , 2% year-on-year in October. This is the biggest jump in a month in over 30 years.

So how do you make sure your portfolio beats inflation?

Here are five investments Wall Street commonly offers as a way to protect against rising prices.

1. Actions

Since 1926, the S&P 500 has returned around 10% per year, on average. The S&P 500 is an index that tracks some of the biggest US stocks and is considered by many experts to be a reliable representation of the entire stock market.

The year-to-date total return of the S&P 500 has been around 26%. So if you had invested in a fund that tracked the S&P 500 last year, you would probably have beaten the current inflation rate by about four times.

“I’m always amazed at how many people forget that common stocks are a hedge against long-term inflation,” says Asher Rogovy, chief investment officer of Magnifina Personal Investment Advisors. “Spikes in inflation and interest rates can certainly hurt short-term stock returns, and many investors in the 1970s remember this well. But stocks represent a real and productive asset. If prices increase, incomes should also increase.

That doesn’t mean you should throw all your money on the market. If the stock market faces a major downturn while you are retired or approaching retirement, you may take a hit from which you have little time to recover. The solution is to diversify your investments, so that other asset classes can take over when one or more declines.

2. Real estate investment fund

Property values ​​and rents tend to rise with inflation, so investing in real estate can be a good hedge against inflation. One of the easiest ways to invest in real estate is through the use of REITs or real estate investment trusts.

REITs are companies that own income-generating real estate such as single-family rentals, hotels and office buildings. Shares of various REITs trade on major stock exchanges, so you can invest in REITs through most brokerage accounts.

By law, REITS must distribute 90% of their taxable income to shareholders as dividends each year. Thus, REITs can provide a constant stream of income.

Over the past 30 years, an index tracking US REITs has outperformed the S&P 500 in five of the seven years when inflation was 3% or more, according to a study by Neuberger Berman.

“At present, we believe that the current cash flow and growth opportunities in many segments of the real estate market make these assets an attractive potential hedge against inflation,” said Ford Donohue, Director of Homirch Berg Wealth Management, in an email to Money.

However, it is important to take a close look at REITs. Like mutual funds and ETFs, REITs charge management fees, which can eat into your returns. REITs also tend to underperform when interest rates are high.

Donohue says that allocating 10% of your portfolio to real estate may be reasonable for someone with a high risk tolerance and a long-term horizon.

3. Commodities

Raw materials are raw materials consumed or used to make other products. Think about crops, steel, oil and more. Many experts believe that commodities are good hedges against inflation. The idea is that if things get more expensive, so do the basics used to make them.

A study by investment firm Vanguard found that over the past decade, for every 1% rise in inflation, the Bloomberg Commodity Index, which tracks movements in futures prices for different sectors of commodities. raw, increased from 7 to 9%.

One of the easiest ways to invest in commodities is through commodity ETFs. These funds target a particular commodity like petroleum or a mixture like petroleum, steel and more. You can also invest in stocks of companies involved in commodities.

“Rather than investing directly in commodities such as gold, oil or gas, we generally prefer to invest in stocks of companies that could benefit from a rise in the prices of these commodities,” says Donohue. “Unlike commodities, businesses produce cash flow that we typically expect to grow over time. A constant flow of cash flow can help an investor determine whether an asset is reasonably priced and should be a driver of long-term growth in its value.

4. Gold

While gold is a commodity, it really deserves attention on its own, given its popularity and the number of websites and TV ads that tout it as the ultimate way to protect your wealth. As it turns out, historical data shows that gold’s performance has been mixed during times of high inflation.

Morningstar analysis found that during the period of soaring inflation between 1973 and 1979, when the average annual inflation rate was 8.8%, gold returned 32%. Gold shone here. But gold investors have seen negative returns during other periods of high inflation.

Period of high inflation: 1980-1984

  • Average annual inflation rate: 6.5%
  • Gold yield (based on LBMA PM USD gold price): -10%

Periods of high inflation: 1988-1991

  • Average annual inflation rate: 4.6%
  • Gold Yield (Based on LBMA PM USD Gold Price): – 7.6%

That’s not to say that gold shouldn’t play a role in your portfolio, especially during times of hyper inflation or stagflation (extremely high inflation coupled with high unemployment.) But it shouldn’t absorb most of the money. your investments. Most financial advisers generally recommend that you invest no more than 10% in gold.

If you want to invest in gold, one of the easiest ways to do so is by using a gold ETF. This saves you from having to buy and store real gold coins.

5. Cryptocurrency

Cryptocurrency seems to be all the rage right now. Many point to Bitcoin’s meteoric rise (over 400% average annual return since 2011) as proof that it can hedge against inflation. But remember, Bitcoin and other cryptocurrencies have experienced extreme market swings.

Cryptocurrency is also generally new. So there isn’t much evidence testing its performance in periods of long-term inflation.

“As inflation continued to accelerate from April, the price of Bitcoin fell about 50% from the April peak of $ 32,500 in mid-July,” Alvin Carlos said. , Managing Partner of District Capital Management in Washington, DC. “Not what you would expect from an inflation hedge.”

Cryptocurrency can mean significant returns for those who can handle its volatility and have a high tolerance for risk. Still, many experts suggest that it shouldn’t take up much of your retirement portfolio or cash flow. Stick to 5% or less, many experts recommend.

“There isn’t enough data to show that you could actually make a living from crypto and survive above the rate of inflation, so you don’t lose your purchasing power,” said Henry Yoshida, financial planner. Certified and CEO of Rocket Dollar.

Also, you can’t use crypto for everything right now.

“You can’t buy most of the things you use in your day-to-day life with crypto,” Yoshida says. “You cannot pay your electricity bill in crypto.”

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