Inflation is an unavoidable economic reality, but it is possible to manage your portfolio to prevent it from detrimentally impacting your finances. The effects of inflation can be immediately obvious, or they can gradually erode the value of your portfolio over time. Fortunately, there are strategies you can employ to help manage and protect your investments.
We know it’s not good, but what exactly is inflation?
In times of great unpredictability, we need to understand the pressures of what we’re dealing with. Simplified, inflation is the rate of increase for the costs of goods and services over time. It impacts markets, investments, wages and debt levels, which by extension affects our personal finances.
With consumers spending less money, the stock market crashes and businesses struggle. Personal credit goes down, cards get maxed out and people invest less as a result.
With businesses making less money, they raise their prices, lay-off employees and freeze wages. Capital goes down, and companies may experience supply chain issues.
It’s a vicious cycle that involves consumers and businesses equally.
How is it measured?
Inflation is typically measured as a broad index as it refers to the overall increase in prices associated with costs of living in a country. It’s calculated by the Consumer Price Index (CPI) by comparing the costs of goods today with what they were one year prior.
It can also be calculated on a micro level by measuring rises in costs such as consumer products, groceries and personal services. Regardless of context, inflation always represents how much more expensive a set of goods or services has become.
Rather than comparing the cost for milk with what it was last year, you can also view inflation as a decrease in the value of money. For example, what could you afford with $50 then that it wouldn’t cover now?
It’s not a happy subject no matter how you look at it, but you can adjust your perception so you can analyze the market and adapt as needed.
You can change your portfolio management strategy anytime.
Inflation leads to decreased purchasing power. If every $1 you invest today turns out to be worth less in the future, your investments will be affected in addition to cost of living. However, by staying informed of market changes, and keeping in contact with a professional in the industry, you can make adjustments to your portfolio that will minimize risk.
1. Rebalance, diversify and reallocate
During high inflation periods, it is important to regularly rebalance and reallocate investments to preserve their value. This means you can temporarily move some investments out of stocks or bonds and into more stable asset classes like cash or commodities. Real estate may also be considered as a stable asset in some scenarios. You’ll want to discuss this subject with your licensed financial advisor before choosing which options are best for you.
2. Invest in growth stocks and funds
Growth stocks and funds allow you to benefit from companies that are growing quickly (even when most aren’t). Persistent industries such as food, energy, healthcare and technology have historically seen record profits during intervals of high inflation.
Ask your financial advisor about trending industries in demand. You can often use economic insight to make calculated estimates, and you may be able to manipulate these changes to work in your advantage, in some cases.
3. Have a backup plan with “inflation-protected” assets
Treasury Inflation-Protected Securities (TIPS), Real Estate Investment Trusts (REITs) and precious metals such as gold and silver have a reputation for being “safe options” for investors during economic hardships. TIPS are bonds issued by the US government that pay investors a fixed rate of return plus an additional amount based on changes in CPI.
Investing in previous metals can help manage your portfolio during inflation, but you should always consult with your financial advisor before diversifying outside of the norm. As the economy improves, you may want to return to an investment plan targeted to build wealth.
EXOS can help you manage your portfolio during inflation
Navigating through the rough waters of inflation on your own is very risky, and there’s no reason to do it alone. If you don’t have a financial advisor, EXOS can match you with someone to help you develop your custom investment plan. Contact us today.
