Wise investments with valuations that trend parallel with increasing consumer costs are the ideal way to protect your wealth from inflation. Unfortunately, your retirement savings efforts can be greatly hindered when markets or your investment portfolio is trending downward while inflation nears double-digit rates.
If you’re concerned about your current retirement investment performance and want a professional second opinion, call Fullerton Financial Planning. One of our investment managers or financial planners would be happy to provide options on how you can better protect your retirement savings returns.
What Is Inflation?
Inflation is when the purchasing power of a currency decreases, causing the price of goods and services to “inflate.”
What Causes Inflation?
The cause of inflation is hotly debated, even among experienced economists. Too much access to cheap money through low-interest financing can inject excessive liquid capital into the economy. Supply chain issues have constrained the supply of products. The government also pumped quite a bit of money into people’s pockets and various industries during the pandemic. This has led to more dollars chasing fewer products, which naturally leads to increased prices (or demand-pull inflation) as consumers compete against each other.
There’s also cost-push inflation, or inflation caused by increased production costs, which can have similar root causes to demand-pull except on a business/manufacturing side instead of the consumer side. The country may also experience “built-in” inflation which has more to do with rising costs of living leading to wage growth, which leads to further price increases as businesses must charge more for services and goods to pay their workers more.
Arguments can be made that the U.S. is experiencing all three types of inflationary pulls at the same time.
Hedges Against Inflation
There are a handful of asset classes that are widely believed to protect investors from inflation. If you’re serious about insulating your household from inflationary pressures, it’s likely in your best interest to speak with an investment advisor.
Diversification
How diversified your portfolio should be will likely depend on the size of your retirement savings accounts and your age. Young people focused entirely on growth might eschew some traditional inflation-protected assets for the aggressive growth offered by equities. Older savers may have their assets heavily weighted toward bonds and other stable and reliable investments with comparatively low returns.
Both of those investment strategies can potentially be problematic during times of high inflation unless the saver is adequately diversified. Bonds are fixed, meaning the purchasing power of the dollars you have sunk in those bonds will decrease while the bond principal and their interest rates remain the same (except for TIPS bonds). Equities usually increase with inflation over time, but during a bear market, equities may move inverse to inflationary pressures.
Diversification is often the best way to avoid either of those pitfalls.
Commodities, Especially Physical Gold
The prevailing wisdom among investors has long been that gold is a “hedge against inflation.” Gold has intrinsic value many other investment options can’t replicate. Some even consider gold an alternative currency.
No inflation hedge is perfect in every circumstance. Gold doesn’t pay yields, which means you could be missing out on the potential investment upside of rising interest rates. However, if you’re looking for opportunities to diversify to shield your assets, some gold may help.
Other commodities can also be a hedge against inflation since their price rises along with production costs. The increases in consumer food prices are partially tied to the increasing cost of commodities like oil and grain. If your money is invested in those types of commodities, it may grow at rates similar to inflation.
Be warned – commodity markets are notorious for their volatility. If you’re unfamiliar with commodity markets, it may be in your best interest to speak with an investment advisor before jumping in.
Real Estate and REITs
Real estate is another asset that will likely increase in value in part due to inflationary pressures.
Real estate is not impervious to other market pressures. However, real estate values tend to trend upward as the purchasing power of the dollar goes down, effectively adjusting for inflation.
As a broad generalization, REITs are often helpful inflation insulators since rental incomes tend to reliably increase due to inflationary pressure. Plus, they generally pay out fairly sizeable dividends compared to other equities.
Treasury Inflation Protected Securities
These special U.S. Treasury Bonds are indexed to inflation for the specific purpose of mitigating inflationary damage. The principal of the TIPS is adjusted based on current inflation rates, and the TIPS pays out at a fixed rate twice a year. This effectively ensures the interest you’re being paid is adjusted for inflation.
In the long term, TIPS tend to underperform regular U.S. government bonds, especially when inflation is low. The Consumer Price Index (CPI) the U.S. government uses to adjust for inflation may also understate inflationary pressures, meaning you might not always get the exact payment you need to make up for the impact your household is feeling.
The price of TIPS is also not guaranteed, meaning they can experience price fluctuations during times of market volatility.
Fullerton Financial Planning Is Ready to Help Phoenix Investors
If you’re looking for ways to shield your investment portfolio from historic inflation rates, Fullerton Financial Planning is here to help. Our advisors can provide ideas on ways you can safeguard your nest egg. Call us at (623) 974-0300 to get started.
