Now that the United States has enjoyed a healthy economy and job growth for several years, it can be easy to overlook the possibility of rising inflation or even another recession. To stay one step ahead, it’s important to pay close attention to the actions of the Federal Reserve. It has already indicated that it is prepared to slowly raise rates to prevent market upset if inflation does crop up again any time soon. With some careful financial planning, you can survive and even thrive in times of rising inflation.
Consider International Diversification
Not every market in the world goes up and down at the same time as United States markets do. Australia, Italy, and South Korea are just three examples of countries that have their own strong markets that respond independently to inflation and other financial changes within their own countries. When you diversify your portfolio with stocks from other countries, it allows you greater protection from rising inflation and other national challenges outside of your control. If rising inflation does become a factor here, you can still depend on foreign issue bonds to provide reliable income.
Move Funds from Bonds to Stocks
If you have all of your money tied up in bonds, you could suffer a significant loss due to rising inflation. It’s a safer bet to move at least 10 percent of your investment funds to stocks rather than have everything in one investment basket. Another benefit of this strategy is that preferred stocks are liquid and will pay you a greater yield percentage than bonds. They also shouldn’t go down in price as much as bonds do the next time the country goes through significant inflation.
Treasury Inflation-Protected Securities
Also known as TIPS, the value of these securities increase over time to keep pace with inflation. TIPS bonds are connected to the Consumer Price Index (CPI) with this principal amount changing each time the CPI changes.
However, it’s important to understand that the value of TIPS has decreased by approximately 10 percent over the past several years, which means you may be able to obtain them for a very reasonable price. That is because the issuers of TIPS have not yet considered rising inflation as a real possibility. Although your returns won’t be significant with TIPS, you could see better performance than other Treasuries if the country sees inflation again any time soon.
Real Estate Investment Trusts (REITs)
As an alternative to bonds, REITs provide the opportunity to own holdings in commercial, industrial, or residential real estate. They typically pay investors a higher yield. Additionally, REIT rates usually remain stable with rising inflation because the cost of operations changes very little.
Schedule an Appointment with an Aura Wealth Financial Advisor
While you can’t control inflation, you can take steps to insulate yourself from its effects. The above are just four potential options. We invite you to meet with one of our financial advisors to learn more about these options or to discuss other possibilities for diversifying your portfolio.