How can you best protect your investments if inflation continues to rise?

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The rapid pace of inflation is one of the main economic trends of 2021.

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The Consumer Price Index or CPI, the government’s main inflation gauge, has been trending at a nearly 5% annual pace for the past several months, up from last year’s 1.4% rate and the 50-year average of around 3.9%.

High rates of inflation have the potential to erode the value of investment portfolios, reviving memories of the 1970s, when big US stocks took it on the chin.


Various investment hedges can help mitigate losses, but the current inflationary trend may not last long – and you may already have enough protection. Before taking any drastic measures to hedge against inflation, consider these issues:

Which asset hedges against inflation?

Various assets can help protect against the growth of inflation. TIPS, or Treasury Inflation Protected Securities, are a clear example on the bond side. Gold and other tangible assets, including real estate, also have a reputation as an inflation hedge. Cryptocurrencies can also fit into that role.

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But during a September 23 webinar on inflation protection hosted by investment researcher Morningstar, the panelists found common ground in a less obvious area: the stock market.

“You’re buying shares in real companies that make real goods and services,” said Katherine Legra, asset-allocation specialist at investment firm GMOs, “whose prices tend to rise over time in an inflationary environment.”

In particular, stocks of natural resource, commodity and real estate companies can perform well during periods of inflation. But other corporations too, assuming they can pass along price increases to consumers.

In the Morningstar discussion, gold received relatively little attention, although PIMCO’s commodity portfolio manager Nick Johnson described the metal as an asset that you can expect to “keep pace with inflation over the very long term”. .

Panelists spent little time on bitcoin and other cryptocurrencies, noting that they have no fundamental value. If you invest in cryptocurrencies, Legra said, you had better hope that “the next guy will like them better than you.”

Do you need more security?

Before making any adjustments, it’s worth taking an inventory of what you own in your investment portfolio. Oil and other energy stocks, mining ventures, real estate companies, and other traditional inflation giants are already among the most widely diversified mutual funds and exchange-traded funds, though perhaps not in the weighting you want.

Energy stocks, for example, make up less than 3% of the broader Standard & Poor’s 500 index. So too for content companies and people engaged in real estate. In contrast, let’s say, about 28% of the index’s assets are in information technology stocks, 13% in health care, and about 12% in consumer-discretionary companies.

For more punch, you might consider adding something else to inflation-protected assets like natural resources or commodity companies, but be careful not to overdo it. As a general rule, allocating 10% or 20% to likely already widely diversified portfolios in these sectors would be sufficient, Johnson said.

Also consider the inflation protection offered by other properties you have, such as a home or rental properties. And if you’re collecting Social Security retirement benefits, keep in mind that you can foresee cost of living adjustments, making Social Security a good inflation hedge. The Social Security Administration will announce the COLA for 2022 next month.

Where is inflation going?

It is not easy to predict the future direction of inflation. Despite the sometimes shocking headlines, it’s possible that we’ve already seen some of the highest numbers in this cycle. Many long-term deflationary forces exist, from global trade and relatively cheap imports to the technological revolution, which continues to drive down costs for computing hardware and other goods and services.

America’s aging population may also contribute to deflation, as older people do not spend as much on new homes, furnishings, vehicles, entertainment, and more (though more in other sectors, especially health care).

Three Morningstar panelists were asked when we expect the CPI numbers to decline and stay below 4% on an annualized basis. Evan Rudy, a portfolio manager at investment firm DWS, said he expects it to happen in the second half of 2022, while Johnson and Legra forecast it to happen earlier.

The reopening of the economy from the COVID-19 pandemic has fueled inflation as consumers began to buy things they had put off, from vehicles to air travel, and as more people joined the workforce. Re-entered and he was hired.

The stretch in supply chains continues and may continue till next year. Prices of some items are already rising at double-digit rates, and retailers and others are warning of shortages for the holiday-shopping season.

Even so, many of these pressures are unlikely to be permanent. Johnson drew a parallel between the recent rise in inflation and the start of the marathon. All runners initially gather in a small pen behind the starting line, he said, but as the race unfolds, the crowds lessen as runners spread out and find their paces.

clues from the past and the future

Previous periods of high inflation were not so common, and unique catalysts tended to trigger each such event. Back in the 1970s, for example, the OPEC oil embargo pushed up energy and transportation costs, and wages were rising at a rapid pace. Legra said there is currently no such oil embargo, and that the relative lack of collective bargaining and union strikes these days suggests that wage inflation is unlikely to occur on a large scale.

“Do workers collectively have enough power to cause widespread wage increases?” He asked. “Right now, workers lack that power.”

If inflation and inflation expectations continue to rise and if interest rates remain high, bond investors could be in for a shock, as seems plausible. Under such circumstances bond prices fall and yields rise. Yet prices are still high and yields on Treasury securities and many other bonds remain near decades-lows, Legrow said, suggesting that investors do not view these as long-term threats.

Federal policies also play a role. As an example, the push toward greener energy and more electric-vehicle charging stations, proposed under President Biden’s Build Back Better plan, could initially lead to more inflation if those initiatives are implemented and construction projects are ramped up. is accomplished, Johnson said. But the emphasis on renewable energy could be deflationary in the long run, he said, if it ultimately means cheaper energy.

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