Financial Advisors in Raleigh NC: Hedging Against Inflation
Most people have seen inflation in action: Prices go up over time. That's why most things cost more now than they did when you were younger. Investing your savings in assets that offer potential growth can help you stay ahead of inflation. This growth can counteract the effects of inflation.
Investors may encounter challenges due to inflation as it erodes the purchasing power of their saved dollars. Over time, the value of money diminishes, limiting its ability to cover expenses adequately. However, there are proactive measures that can be implemented to potentially safeguard investments and counteract the effects of inflation.
Inflation: The Basics
Inflation refers to the upward movement in prices of goods and services within an economy. It signifies that more money is required to purchase the same items. Conversely, deflation is the opposite of inflation, characterized by a decrease in prices across a variety of goods and services.
Forecasts of inflation hold significant influence over participants in the securities market. Generally, expectations of future inflation are already incorporated into the prices of stocks and bonds, along with inflation hedges. Consequently, these inflation hedges prove most valuable during periods of unexpected inflation. When the prevailing sentiment suggests an impending inflationary trend, the prices of securities are typically adjusted to account for it.
Common Hedges
Inflation is a normal market occurrence. However, during times of high inflation, it is beneficial to reassess your portfolio. This will help determine if it still meets your desired rate of return and risk tolerance.
Stay invested in stocks
Stocks offer higher potential returns, which can help you outpace the rate of inflation. But they can also be volatile.
Investing in the stock market, therefore, is a widely used inflation hedge. Shares in companies with large cash reserves and pricing power are attractive investments. They can raise prices without losing customers. Consider holding a greater portion of stocks to take advantage of higher returns if your risk tolerance allows it. Investing does involve risk, including the loss of your principal.
Commodities
Businesses tied to natural resources and commodities are frequent refuges during when inflation rises. They can be super volatile and can go the other directions when inflation weakened. This category covers a range of sectors such as industrial metals, crude oil, natural gas and petroleum products, precious metals, platinum, palladium, and silver. Within the precious metals sector, gold and gold mining companies hold a prominent position.
Consumer Staples
During periods of inflation, some businesses do better than others. Companies selling consumer staples often draw the interest of people who want to guard against inflation.
This category includes companies that offer essential items. These items include basic food, like milk and bread, and necessities like toilet paper. Additionally, pharmaceuticals and utilities are also commonly utilized as inflation hedges.
Fixed Income Investments
Short-term bonds can be a beneficial option for investors. They generally pay lower interest rates than longer-term bonds. As a result, you typically will earn less income but they can potentially help reduce the impact of increasing interest rates caused by inflation. Fixed-income investments, especially those with longer durations, often experience value depreciation in such circumstances.
However, short-term fixed-income securities like bonds and other income securities can help counteract this effect. When interest rates rise, newly issued bonds reflect the prevailing interest rate environment, allowing investors to adapt accordingly. Notably, money market fund returns closely align with current interest rates, making them particularly responsive to these fluctuations.
Bottom Line
Remember that your investment portfolio is customized to suit your long-term goals, risk tolerance and time horizon. Keep this in mind as you consider your investment options.
It is important to refrain from making impulsive investment choices solely driven by short-term economic fluctuations. Ensure that any hedging strategies you employ are in line with your overall financial plan and contribute towards achieving your objectives. Stay focused on your financial goals and make decisions that help you remain on track towards reaching them.
Sources:
https://www.thinkadvisor.com/2022/07/13/6-investing-ideas-to-hedge-against-inflation/
https://www.fidelity.com/learning-center/trading-investing/money-and-inflation
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