How to invest smartly when inflation picks up

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Prices are rising faster than usual, and the threat that more investors are talking about is inflation.

Inflation poses a number of challenges for investors, experts say.

The simplest thing is that as the cost of living goes up, your returns won’t go that high. This is a particularly annoying problem for retirees, who may rely primarily on their profits to pay their bills, while younger people have their paychecks too (and high inflation tends to lead to higher wages).

Another risk is that the Federal Reserve may raise interest rates to contain rising costs, which tends to weigh on stocks.

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“In general, inflation is usually negative for stocks,” said Amy Arnott, portfolio strategist at Morningstar.

She pointed to history as evidence: Between 1973 and 1981, inflation rose more than 9% annually. During the same period, the shares fell by around 4% annually.

But don’t panic – this has never helped an investor.

First, we still don’t know if rising prices will become the new normal or if it’s just a temporary result of a nation emerging from a pandemic and a year of lockdowns and restrictions. And even if costs keep rising in the next few hearings, history shows stocks beat inflation in the long run.

According to calculations by Steve Hanke, Professor of Applied Economics at Johns Hopkins University in Baltimore, the average annual stock return between 1900 and 2017 was around 11%.

After deducting inflation costs, this average annual return remains at an impressive 8%.

Still, there are a few steps investors can take to protect their money from inflation – and even better the environment, say financial advisors.

Investing to Avoid Inflation

With a possible Fed rate hike imminent, experts recommend that you don’t tie up too much money in long-term bonds or certificates of deposit now. This could result in missing out on higher rates later.

“I currently advise clients to focus on short to medium term bonds and avoid investments that are named ‘long term’,” said Doug Bellfy, certified financial planner with Synergy Financial Planning in South Glastonbury, Connecticut.

Another area you might want to stay away from is in growth stocks or companies with above-average expected earnings, said Alex Doll, CFP and president of Anfield Wealth Management in Cleveland, Ohio.

“Growth stocks tend to perform worse because they expect to make most of their cash flow in the future,” said Doll. “And when inflation rises, those future cash flows are worth less.”

He pointed to Tesla as an example. “Tesla is down over 20% this year due to some issues, but inflation and rising interest rates are a big factor,” said Doll.

This is how you benefit from rising prices

As Doll has scaled back its clients’ exposure to growth stocks, he has increased their allocation to value stocks or companies that trade at below-average prices on the S&P 500.

“Value stocks can do a little better in periods of inflation,” said Doll.

That’s because these companies are often in industries like finance and consumer staples that are less affected by inflation. Doll said, “These industries tend to do better because they have more pricing power and can help raise their prices.” Inflation better than other industries. “

Real estate is doing well because landlords and property owners see their properties increasing in value.

Alex Doll

President of Anfield Wealth Management

These companies are usually already well established so that one does not have to worry so much about the expected loss of value.

Another good example of investors worried about inflation is Treasury Inflation Protected Securities (TIPS), said CFP Nicholas Scheibner, wealth management advisor at Baron Financial Group in Fair Lawn, New Jersey.

These securities pose a risk similar to other fixed income investments, but add an adjusted principal as inflation rises.

Other hedges against inflation, according to consultants, are investments in real estate, gold and even cryptocurrencies.

“Real estate is doing well because landlords and property owners are seeing their properties rise in value,” said Doll. “But even landlords can easily go through rent increases.”

The case for investing in cryptocurrencies or gold amid inflation is that these assets will not be damaged by the dwindling value of cash.

However, both are very volatile and shouldn’t make up more than 5% of your portfolio, experts warn.

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