With inflation stubbornly hanging around, despite the Federal Reserve’s attempts to tame it, investors are anxiously eyeing their portfolios. Though inflation has eased from its sky-high levels last seen decades ago, fresh pressures loom that could nudge prices upward once more. This makes right now an ideal moment to revisit your investments and consider whether sprinkling in some inflation shields might be a savvy play.
Below, we unpack five standout inflation hedges designed to fortify your portfolio, alongside two types of assets you’d be wise to sidestep if you suspect inflation has some staying power.
How Inflation Took the Driver’s Seat
A volatile mix of gargantuan government stimulus packages, rock-bottom interest rates, and tangled supply chains catapulted inflation to heights not witnessed in over four decades during 2022. Despite the Fed’s continued maneuvering, inflation lingers annoyingly above the 2% target, showing signals it may stick around longer than many anticipated.
Surprisingly, if inflation persists, borrowing can turn into a strategic advantage—provided you steer clear of direct inflation exposure. Why? Taking out a loan with a locked-in interest rate means you pay back your debts with dollars that gradually lose purchasing power, essentially giving you a discount on future repayments. This strategy pays off even more when the borrowed funds go into appreciating assets, such as property.
Inflation Shields Worth Your Attention
1. Treasury Inflation-Protected Securities (TIPS)
When you want to guard your government bond investments against inflation’s unpredictability, TIPS come into play. These U.S. Treasury bonds are tied directly to inflation metrics, meaning their effective interest rates fluctuate up or down in tandem with inflation’s twists and turns.
- Interest is disbursed biannually.
- Available in 5-, 10-, and 30-year maturities.
- Backed by the full faith of the U.S. government, making them among the safest bets you’ll find.
2. Floating-Rate Bonds
Traditional bonds typically dole out fixed payments, leaving them vulnerable to inflation’s gusty winds. Floating-rate bonds, however, offer a clever workaround: their interest payments adjust in line with market rates, providing a cushion against creeping inflation while maintaining the safety net of government debt.
3. Real Estate and Mortgage Strategies
Owning property can be a subtle yet potent inflation hedge. When borrowing through long-term fixed-rate mortgages—often spanning up to 30 years—you lock in your borrowing costs, shielding you from future rate spikes. Plus, should interest rates dip, refinancing offers added flexibility. Real estate values often climb alongside inflation, offering potential price appreciation. And, depending on your jurisdiction, mortgage interest may be tax-deductible, sweetening the deal.
4. Equities That Weather Inflation Storms
Stocks don’t all react the same way to inflationary pressures. While the broader market might wobble amid inflation jitters, resilient companies with solid fundamentals tend to push through. Maintaining a diversified portfolio or focusing on sectors that thrive when inflation or interest rates surge can be rewarding.
5. Gold as a Tangible Value Vault
Gold frequently shines brightest when real interest rates (nominal rates minus inflation) dip below zero. In turbulent economic times, investors flock to gold as a trusted store of value. If you want to avoid the hassle of physically storing gold, exchange-traded funds (ETFs) provide accessible alternatives. ETFs can give you exposure to physical gold or shares of gold mining companies, which might offer enhanced gains if gold prices spike.
Quick fact: Historically, gold has outperformed during periods when the U.S. dollar weakens and inflation rises, making it a time-tested inflation safeguard.
Profiting in an Inflationary Climate
Inflation doesn’t drag down everyone equally; some sectors actually thrive. Banks, for instance, often enjoy wider profit margins as rising interest rates let them charge more on loans compared to what they pay on deposits. Meanwhile, firms with minimal capital needs and the muscle to hike prices without losing customers often emerge strong, sustaining and even growing their earnings during inflationary cycles.
Legendary investor Warren Buffett once mused that an unregulated toll bridge would be his dream inflation play—already built with “old dollars,” allowing toll hikes to offset rising costs without reinvestment. A brilliant metaphor for owning assets with pricing power in inflationary times.
Assets That Inflation Hits Below the Belt
1. Long-Term Fixed-Rate Bonds
If inflation picks up and sticks around, long-dated bonds can get walloped. Why? When inflation surpasses a bond’s interest rate, the bondholder’s purchasing power shrinks over time. Consequently, the price of these bonds plunges to compensate. Longer maturities magnify this effect, leading to sharper price swings. Owning such bonds during rising-rate environments can cause immediate principal losses, with recovery only at maturity—potentially decades down the road.
2. Long-Term Fixed-Rate Certificates of Deposit (CDs)
Much like fixed-rate bonds, CDs locked in for extended periods can suffer if inflation overtakes their rates, eroding real returns. However, inflation-protected CDs exist, adjusting payouts in line with inflation changes, providing an alternative for safety-conscious investors.
Final Thoughts: Navigating Inflation Wisely
Inflation remains a looming concern, and the market eagerly awaits the Federal Reserve’s next moves to get a firmer hold on rising prices. Regardless of the outcome, evaluating how inflation might influence your portfolio and taking thoughtful, cost-effective steps to safeguard your financial health is a prudent approach.
Editorial note: Always conduct thorough personal research or consult a financial advisor before making investment decisions. Remember, past returns do not guarantee future performance.
