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Inflation simply refers to the rising prices on goods and services across an economy over a period of time. It is measured with the “inflation rate,” calculated as a percentage of change of a price index from one year to the next.
Here are the top five asset classes to consider when seeking protection from inflation:
1. Reallocate Money Into Stocks
If inflation returns, it’s generally a punch in the jaw for the bond market, but it could be a shot in the arm for the stock market. Consider reallocating 10% of your portfolio from bonds to equities in order to take advantage of this possible trend.
Buying preferred stocks is another possibility. These liquid issues will pay a higher yield than most types of bonds and may not decline in price as much as bonds when inflation appears.
Utility stocks represent a third alternative, where the price of the stock will rise and fall in a somewhat predictable fashion through the economic cycle and also pay steady dividends.
2. Diversify Internationally
There are several major economies in the world that do not rise and fall in tandem with the U.S. market indices, such as Italy, Australia, and South Korea. Adding stocks from these or other similar countries can help to hedge your portfolio against domestic economic cycles. Bonds from foreign issuers can likewise provide investors with exposure to fixed income that may not drop in price if inflation appears on the home front.
3. Consider Real Estate
Real property often acts as a good inflation hedge, One of the easiest ways to get exposure is through real estate investment trusts (REITs), which own portfolios of commercial, residential, and industrial properties. Providing income through rents and leases, they often pay higher yields than bonds. Another key advantage: Their prices probably won’t be as affected when rates start to rise, because their operating costs are going to remain largely unchanged.
4. Look to TIPS
Treasury inflation-protected securities (TIPS) are designed to increase in value in order to keep pace with inflation. The bonds are linked to the Consumer Price Index and their principal amount is reset according to changes in this index.
TIPS’ yields have dropped in value in the secondary market considerably since 2018.1 They may be a good bargain at this point, as they have not yet priced in the possibility of inflation.
5. Buy Bank Loans
Senior secured bank loans are another good way to earn higher yields while protecting yourself from a price drop if rates start to rise. The prices of these instruments will also rise with rates, as the value of the loans increases when rates start to rise (although there may be a substantial time lag for this). The Lord Abbett Floating Rate Fund (LFRAX) is one good choice for those who seek exposure in this area.
Culled From Investopedia.
