Inflation has been of little concern to investors for over a decade. As the pandemic seems to be ending, the global economy will open up in the near future. Consider protecting your investment portfolio from inflation.
1. Why does inflation matter to your financial plan?
Prices go up over time. Invest in assets that have the potential to counteract the effects of inflation. For example, if the annual inflation rate is supposed to be 2% then build a portfolio that has the potential to return at least 2%.
2. What can you do?
Evaluate your portfolio to make sure you have a combination of investments to provide a return to keep up with inflation. Investments will vary based on your age and employment status. A younger investor may not need to add additional inflation risk in their portfolio with 40+ years until retirement. However, a retiree with a conservative investment mix may be susceptible to a higher inflation risk.
3. Look out for inflation surprises
Some inflation is normal and means the economy is growing. Be aware though that inflation doesn’t always behave as expected. Having a plan in case things don’t go as expected is key.
4. Inflation periods can be challenging
A challenging aspect of inflation is that funds that do well during high inflation do not typically do well most of the time. One example is gold. While gold has historically kept up with inflation, it doesn't offer compounding returns and the price can be relatively flat for long stretches of time. "One of the lessons here may be that, during normal times, investors may want to limit that portion of their portfolios dedicated to inflation hedges (like gold), given the high opportunity cost of reduced investment in assets that compound over time. But when conditions go extreme—meaning high inflation or hyperinflation—no matter how big one's hedge is, it will seem not nearly enough, at least in my experience," says Jurrien Timmer, director of global macro at Fidelity.
5. Be proactive!
Just like other economic risks, investors need to plan for inflation. Making sure your portfolio is an investment mix considering your age until retirement and financial situation is important. While you can’t avoid inflation, taking these steps will help you keep to your financial goals. For more details, visit Full Fidelity Article or contact Brien at Brien@traditionswealthadvisors.com or 979-694-9100.