Protect Your Retirement Portfolio From Inflation

When prices rise rapidly and persistently during an inflationary spiral, dollars lose purchasing power and investors can see the value of their portfolios decline.

Inflation-hedging strategies try to counter the wealth-eroding effects of inflation by selecting investments that can potentially counter the effects of inflation.

Many investing experts recommend strategies involving a mix of equities, short-term fixed-income investments and holdings related to commodities and real estate. Special-purpose vehicles such as Treasury Inflation-Protected Securities also can play an important role.

One way to help ensure your investment or retirement portfolio is better protected from inflation is to consult a financial advisor.

About 71% of U.S. adults admit their financial planning needs improvement. Yet, only 29% of Americans work with a financial advisor, according to a recent study.

The value of working with a financial advisor varies by person and advisors are legally prohibited from promising returns, but research suggests people who work with a financial advisor feel more at ease about their finances and could end up with about 15% more money to spend in retirement.

A recent Vanguard study found that, on average, a hypothetical $500K investment would grow to over $3.4 million under the care of an advisor over 25 years, whereas the expected value from self-management would be $1.69 million, or 50% less. In other words, an advisor-managed portfolio would average 8% annualized growth over a 25-year period, compared to 5% from a self-managed portfolio.

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Inflation: The Basics

Inflation is the increase in the prices of goods and services across an economy. When prices inflate you need more money to buy the same things.

When the inflation rate as measured by the consumer price index (CPI) rises above the 2% rate favored by federal policymakers, it can indicate that inflation is getting out of control. The result can make it harder for consumers and businesses to reach their financial goals and to preserve their existing wealth.

Participants in the securities market are highly sensitive to forecasts of changes in inflation. This means that, as a rule, expectations of future inflation are already factored into prices for stocks and bonds, including inflation hedges. So these inflation hedges are most useful when unexpected inflation occurs. If the prevailing sentiment has been that inflation is on the way, the prices of securities can be counted on to already reflect that.

While there are a number of relatively complex strategies sophisticated investors use to counter the effects of inflation, here are six of the most common:

1. Consumer staples

Some businesses tend to do better than others during inflationary spells, and those that sell consumer staples are often popular among inflation-hedgers. These include companies that sell basic foods like milk and bread and necessities such as toilet paper. Pharmaceuticals and utilities are also used as inflation hedges.

2. Commodities

Businesses tied to natural resources and commodities are frequent refuges when inflation rises. This category encompasses numerous fields: industrial metals like copper and nickel; crude oil, natural gas and petroleum products; so-called “softs” like corn, timber and soybeans; precious metals, including platinum, palladium and silver. Prominent in the latter sector are gold and gold mining companies.

3. Real estate

Investing in real estate investments, including real estate investment trusts are a popular response to inflation. These shares tend to pay dividends that outpace inflation and their underlying real estate assets tend to become more valuable during inflationary episodes, according to the real estate trade association Nareit. Owning actual real estate is also a good inflation hedge.

4. Short-term bonds

Interest rates generally rise with inflation and that means fixed-income investments, especially longer-term ones, tend to lose value. Short-term fixed-income securities like bonds and other income securities can mitigate this effect because as rates rise new bond issues reflect the current interest environment. Money market fund returns are particularly closely tied to current interest rates.

5. Treasury Inflation-Protected Securities 

The value of these U.S. government fixed-income securities is directly tied to the CPI, increasing as inflation rises. When the bond matures, the investor receives either the amount of the original principal or the amount adjusted for inflation.

How to Help Protect Your Portfolio From Inflation

Hedging against inflation calls for a high degree of knowledge about financial instruments as well as awareness of economic trends and an investors’ individual goals and needs. For this reason, we recommend speaking with a financial advisor.

An experienced financial investor can be an invaluable asset when inflation threatens. Advisors can help you understand your options and look for ways to protect your portfolio, continue to make smart investments and plan for retirement.

If you need help finding a financial advisor, we created a free quiz to help Americans find and vet qualified financial advisors who serve their area.

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