Should you change your investment approach in response to rising inflation?
If you’re driving, you’re probably feeling the “pain at the pump” caused by inflationary pressures and global supply chain disruptions from Russia’s invasion of Ukraine that have driven up gasoline prices in recent months. But the sticky shock goes beyond gas stations. In 2021, the inflation rate, according to the Consumer Price Index, rose by 7.0%, the largest annual change in the cost of living since the early 1980s.
What does this mean for consumers? Essentially, the cost of an average basket of goods rose seven percent in just one year — and it remains to be seen how long it will take for inflation to subside. While much attention is paid to how this affects short-term purchases such as food and clothing, it is also important to consider the losses that can occur to your investments. Keep in mind that over the 10-year period ending in 2020, the average annual inflation rate was 1.7%. At this level, it would take more than 40 years for the cost of living to double. If the annual inflation rate, as it was in 2021, averages 7% annually, the cost of living will double in just over ten years.
If you’re wondering if your portfolio is built to withstand these challenges, here’s some information to help you decide:
Investment considerations in times of inflation
First, remember that a change in the inflationary environment does not necessarily mean that it is wise to change your investments significantly. If your portfolio is appropriately balanced with your risk tolerance and time horizon in mind, adjusting your investments may be a more appropriate strategy.
In general, stocks (also known as stocks) play an important role in long-term portfolios. Compared to other asset classes, stocks may experience more volatility in the short term. However, they historically yield higher returns in the long run and should be positioned to do so in your portfolio, especially if you have a long time horizon. Making regular equity investments through retirement plan contributions can be an effective way to build your holdings of stocks in a volatile market environment. Regular investing can enable you to buy more shares in an investment at a lower cost when markets are down and pay out fewer shares when prices are high.
Fixed Income Investments
Bond yields don’t always keep pace with inflation, especially with the rising cost of living as it is today. If you are concerned about this, investing in Treasury Inflation Protected Securities (TIPS) is one option to consider. These are tradable securities that pay a specified interest rate, but the underlying value of the bond is adjusted based on the rate of inflation.
It is also worth considering I-Bonds an inflation-linked fixed income investment, a form of US savings bonds. You can invest up to $10,000 annually in these bonds. The interest rate paid is adjusted every six months based on the inflation rate. In early 2022, I-Bonds is paying a dividend of 7.12%. However, these bonds are not fully liquid, so you should commit your funds for at least a year, with full liquidity reaching within five years.
Other investment options
There are other investments that offer the possibility of diversification in a period of high inflation. This includes real estate, which may experience rising values and higher income streams that often reflect changes in the cost of living. Real estate investment trusts are marketable securities that provide easy access to the real estate market. Precious metals such as gold can play a role as an inflation hedge. However, gold is a highly volatile asset class and should not represent more than a small percentage of your portfolio.
Good time to plan
It may be helpful to sit down with your financial advisor for an accurate assessment of how your portfolio and overall financial plan are positioning in today’s economy. Your advisor can help you assess how to manage your current expenses more efficiently while still keeping your most important savings goals on track.
Bronwyn L. Martin, is a certified financial advisor and financial advisor with Martin’s Financial Consulting Group, a financial wealth advisory practice for Ameriprise Financial Services LLC. Based in Kennett Square and Havre de Graces, Maryland, she specializes in fee-based financial planning and asset management strategies, and has been in practice for more than 22 years. To contact her: www.ameripriseadvisors.com/bronwyn.x.martin