How to Protect Your Portfolio from the Effects of Inflation

By September 12, 2019 Wealth Management
How to Protect Your Portfolio from the Effects of Inflation

The term inflation refers to the rate at which the cost of purchasing goods or services is in a state of rising. It’s natural to expect inflation over time. However, it can become a problem for consumers and investors when an excessive degree of inflation impacts their purchasing power. Inflation rates in July 2019 rose by 1.8 percent over the previous month. Although it has been nearly 10 years since the end of the last recession, creating an investment strategy that remains mindful of inflation is always a good idea.

The Stock Market and Inflation

When prices rise in the general economy, it can be good news for equities. Conservative investors who want to earn a steady stream of income that can keep up with rising prices may wish to consider investing in TIPS, which stands for Treasury Inflation-Protected Services. Some of the benefits of these government-issued bonds include:

  • TIPS bonds come with a guarantee that their base value will increase with inflation according to the Consumer Price Index.
  • The interest rate remains fixed.
  • Investors can purchase TIPS bonds directly through the government with only a $100 minimum investment and maturity periods ranging from five to 20 years.

International bonds can also be a good choice for investors concerned about inflation. In addition to offering portfolio diversification, investing internationally can lower your risk because other countries may not be experiencing inflation at the same time or rate as the United States.

Other Potential Portfolio Picks to Guard Against Inflation

When the value of paper money begins to depreciate, people sometimes look to gold to provide the type of stability they desire as an investor. There’s a good reason for optimism since the price of gold tends to increase in value during times of inflation. Investing in real estate when consumer prices rise might seem counter-intuitive, but the value of residential and commercial property tends to increase as prices do.

If you’re well-versed in commodities, an investment in emerging-market countries can provide you with a significant return on investment. The income source comes primarily from the export of commodities.

Consider Deflation as Well

Referring to a general decline in prices, deflation is on the opposite side of the coin as inflation. It’s less common than inflation and happens when an unexpected low demand in the economy causes extreme price drops. Deflation is typically present during times of economic depression and high unemployment. Bonds tend to perform better than stocks when deflation is more prevalent than inflation. This is true of both foreign and domestic bonds.

Meet with Our Financial Advisor to Ensure a Balanced Portfolio

Managing your portfolio while considering the impact of both inflation and deflation isn’t always easy. We invite you to learn more about the wealth management services provided by Aura Wealth and then schedule an appointment with an advisor. While it’s not always possible to guard against inflation or recession entirely, we will help you evaluate all options to put you in the best possible financial position.