Investing to beat inflation
Many investors who are planning to retire soon are concerned by the impacts of inflation on stocks and bonds, especially because they will need the income from their portfolios. When you invest in a long-term plan, the best predictor of future returns is past performance. The same holds true for investments like Treasury bonds and stocks that pay dividends as well. let me explain in detail what actually is investing to beat inflation.
Two key drivers of inflation are consumer spending and wages and both have rallied since the start of the global pandemic. Due to the improvement in the economy, corporate earnings have also grown as the Federal Reserve has conducted a large amount of bond buying. As the unemployment rate drops and more people get back to work, wage growth will be the next key inflationary driver.
What is Inflation?
Inflation is a serious concern for most investors. Inflation is the consistent increase in prices over time. In short, it’s a measure of how much one dollar buys you less each year than when that same amount was first purchased (e.g., $100 today costs about 75 cents more than 100 dollars bought last century). As such an effect has two major impacts on investments — primarily reducing purchasing power and secondarily causing assets to grow at different rates from what they would be there have not been any price increases since the purchase date. How do these effects impact our portfolios? First off let’s look at reduced growth rate due solely because of increased cost
Rapid price increases lower a currency’s purchasing power, reducing the number of goods and services you can buy with money. This damage can be overcome by investing, although your capital is at risk and different asset classes will offer varying levels of inflation protection.
Sectors that perform well during inflationary periods.
1. Consumer goods, which include autos and home improvements items like appliances, furniture, or carpets.
2. Investment-grade bonds (high yield) in the US where 10-year Treasuries have a Moody’s rating between AA1 to Aa2
3. High-income countries with relatively low-interest rates; include developed economies such as Australia, Canada & Japan, etc. Also known as safe-haven investments because they offer protection against currency fluctuations/speculative attacks on other markets due to their strength by nature of being backed up by nations’ own currencies.
How do you defend your portfolio against inflation? Investing Wisely!
Inflation can have a significant impact on our investment portfolio over time. With the help of financial professionals and the advisor, there are two ways by which we can protect our investments against inflation:
1. You shield your money against inflation by diversifying our portfolio with exposure to U.S. stocks and real assets such as commodities. However, there is no guarantee that diversification and asset allocation will protect against losses or guarantee returns.
2. Consider Treasury inflation-protected securities (TIPS). The rate of return (RRR)on TIPS, issued by the U.S. government, is adjusted in accordance with the Consumer Price Index. This can result in a somewhat performance than other types of bonds and asset classes. However, Treasury inflation-protected securities (TIPS) returns and income tend to be relatively low.
Inflation might be beyond our control, but measures and action should be taken for investing to beat the inflation to help preserve our investment and savings from its effects.