Exploring Inflation-Proof Investments for Your Portfolio

Exploring Inflation-Proof Investments for Your Portfolio

May 20, 2024

Millions of households still face the prospect of paying higher interest rates, as the Reserve Bank continues its fight against inflation; making now a crucial time to reassess your investments.

Consumer prices rose 0.3% from March to April, the Labor Department said last week, down slightly from 0.4% the previous month. Measured year-over-year, inflation ticked down from 3.5% to 3.4%. A measure of underlying inflation, which excludes volatile food and energy costs, fell to the lowest level in three years.

Inflation had been unexpectedly high in the first three months of this year after having steadily dropped in the second half of 2023. The elevated readings had dimmed hopes that the worst bout of inflation in four decades was being rapidly tamed. 

However, the fight against inflation is far from over, and volatility remains rife.So, how can you protect your investment portfolio? In this blog, we'll explore strategies and assets that can strengthen your portfolio against the impact of inflation. Here's what you need to know.

Understanding Inflation

Inflation is a broad and sustained rise in the prices of products and services. The inflation rate is calculated as the average price increase of a basket of selected goods and services over one year. High inflation means that prices are increasing quickly, while low inflation means that prices are increasing more slowly.

So, what causes inflation? One big reason is when there's more money floating around. This can happen in different ways:

  • Printing and distributing more money to people.
  • Legally reducing the value of the currency.
  • New money can be created through the banking system by buying government bonds from banks.
  • Shortages of key goods lead to price increases in other areas.

Regardless of the causes, when there's a surplus of money in circulation, its purchasing power diminishes, leading to inflation. Let’s take a look at how it can impact your investments.

What Does Inflation Mean for Your Investments?

Understanding the relationship between risk and reward and your comfort level is crucial when building your investment portfolio. The rate of inflation represents the rate at which the real value of an investment is eroded and the loss of spending or purchasing power over time. This means that if your investments cannot keep pace with inflation, the real value of your portfolio will decline over time.

Maintaining a diversified approach to your portfolio can help protect its value. By spreading investments across different asset classes, investors can help reduce overall exposure to inflation risk. Additionally, certain market sectors, such as commodities and real estate, tend to perform well during periods of rising inflation, providing a hedge against inflationary pressures.

Given that inflation has both advantages and drawbacks, working with a fiduciary advisor can help provide guidance based on your goals and risk tolerance. By understanding the implications of inflation on your investments, you can develop a resilient investment strategy that preserves your assets and withstands inflationary pressures.

TIPS

Treasury Inflation-Protected Securities (TIPS) are bonds issued by the U.S. Department of the Treasury that offer protection against inflation. Unlike traditional bonds, the value of TIPS is based on changes in the Consumer Price Index (CPI). When inflation rises, the principal value of TIPS increases. This means the interest payments also increase because they are calculated based on the adjusted principal value. This feature helps ensure that investors receive a return that keeps pace with inflation, providing a hedge against the erosion of purchasing power over time.

TIPS are available in maturities ranging from 5 to 30 years and pay interest semiannually. The interest payments fluctuate with changes in inflation. Investors can expect higher interest payments when inflation is high and lower payments when inflation is low. At maturity, investors can receive either the adjusted principal value or the original principal value. This feature can help protect investors from experiencing a loss of principal due to inflation.

This type of investment is considered relatively low-risk because they are backed by the U.S. government. However, like any investment, evaluating the pros and cons of investing in TIPS is important. Working with a fiduciary advisor can help you find the right strategy for your risk tolerance and goals.

I Bonds

U.S. Treasury issues these savings bonds specifically designed to protect against inflation. They have a unique yield of a fixed interest rate and an inflation-based component that adjusts every six months. The inflation-based element is contingent on changes in the Consumer Price Index (CPI), a widely used measure of inflation.

I bonds are a safe choice to help shield yourself from inflation while earning a reasonable return. Although they might not yield the high returns of riskier options such as stocks, they offer a low-risk alternative. However, it's important to note that I Bonds have some limitations. In a calendar year, one Social Security Number or Employer Identification Number may purchase up to $10,000 in electronic I bonds and up to $5,000 in paper I bonds (using your tax refund).

As of May 2024, I bonds have a savings rate of 4.28%, including a fixed rate of 1.30%. Ultimately, whether or not I Bonds is a good fit for your portfolio depends on several factors, including your goals, risk tolerance, and current market conditions. Working with a fiduciary advisor can help you evaluate your investment strategy that aligns with your needs and goals.

REITs

Real Estate Investment Trusts (REITs) are investments that own and operate income-producing real estate properties, such as apartment complexes, shopping centers, and office buildings. REITs help offer high dividend yields and can help provide investors with a steady source of income. This investment is often considered a hedge against inflation because real estate values and rental income increase during rising prices. Here are some reasons why investors choose real estate

  • Steady cash flow: When you invest in places like homes or certain real estate groups, you get a regular paycheck from tenants.
  • Diversification: If you already have money in investments like stocks or bonds, adding real estate is like adding a different flavor to your money mix. It doesn't move in the same way as the others.
  • Tax benefits: Some great benefits exist if you own a rental property. For example, the value drop of the house over time can reduce your tax bill. Some can even use losses from properties to help lower taxes.
  • It's useful: Unlike some investments that are just numbers on a screen, real estate is real. Even if its price decreases, someone can still live in it and pay rent.

Ultimately, REITs can help ensure rental income keeps up with the pace of inflation, possibly providing investors with a steady source of income and the potential for long-term growth. As with any investment, evaluating the risks and potential rewards of investing in REITs demands careful consideration. Working with a fiduciary advisor can help develop a comprehensive investment strategy that aligns with your unique needs and goals is essential.

Commodities

Commodities are another popular option if you’re looking to protect your portfolio against inflation. Commodities are physical goods often used to produce other goods and services, such as oil, gold, and wheat. However, investing in commodities can also be done through exchange-traded funds (ETFs) or futures contracts. ETFs track the performance of a specific commodity or a basket of commodities, providing investors with diversified exposure to the commodity markets.

During periods of inflation, the prices of commodities often rise as demand increases and the purchasing power of currencies declines. This can make investing in commodities an attractive option for investors looking to hedge against inflation. Additionally, commodities can be more challenging than other asset classes, as they often require technical knowledge and access to specific markets.

As with any investment, it's essential to carefully evaluate the risks and potential rewards of investing in commodities and to work with a fiduciary advisor to develop a comprehensive investment strategy that aligns with your unique needs and goals.

Savings, CDs, and Money Market Accounts

Traditionally, savings, CDs, and money market accounts have yet to be considered high-growth investments. However, as inflation rates have risen, these lower-risk options have become more appealing to investors. Finding savings accounts with interest rates from reputable banks in the 5.35% range is possible, providing a competitive return on cash holdings. 

While these types of accounts may not offer the potential for high returns like riskier investments, they can provide a stable income source and help preserve the value of your savings over time. As with any investment, it's essential to carefully evaluate the risks and potential rewards of investing in savings, CDs, or money market accounts and to work with a financial advisor to develop a comprehensive investment strategy that aligns with your unique needs and goals.

Final Thoughts

If you're concerned about the impact of inflation on your retirement savings, consider inflation-proof investments like the options listed above. However, evaluating your investment options and developing a comprehensive strategy that aligns with your unique needs and goals can be complex. That's where working with a trusted fiduciary advisor can be valuable. At Agemy Financial Strategies, we provide tailored solutions for your investment portfolio, retirement plan, and lifestyle management needs.

We can help you navigate the markets, adjust your asset allocation, and develop a plan to help weather inflation and other market forces. By working with our fiduciary advisors, we can help you navigate complex market conditions and make informed investment decisions.

Contact our team today to develop a comprehensive investment strategy for a stress-free retirement.