Prices of all commodities are rising faster than usual, and the threat that investors are worried about is hot inflation. According to experts, inflation poses many challenges for investors.
Simply, when the cost of living increases, profits will not be able to soar. That’s a problem for retirees because they can probably rely heavily on profits to pay for their living expenses, while younger people have wages (higher inflation can put wages at risk). wages increase).
Another risk is for the Fed to raise interest rates to control rising costs, a trend that could also drive the stock market lower.
First of all, it’s still unclear whether rising prices are the new normal or just a temporary consequence of the post-pandemic economic recovery and a year of shutdowns. Even after commodity prices continue to rise at a steady rate into the future, the historical record shows that the stock market has weathered inflationary difficulties for a long time.
According to calculations by Steve Hanke, professor of applied economics at Johns Hopkins University, the average annual return from the stock market was about 11% between 1900 and 2017. After deducting the cost of inflation, the average annual return remains at 8%. However, investors should come up with some strategies to preserve their money against inflation risks and maybe even take advantage of that.
Investments to avoid amid hot inflation
Because the Fed can raise interest rates, experts advise against putting too much money into any long-term bonds or certificates of deposit. This could cause you to miss out on high-interest rates later on.
Doug Bellfy, a financial planner at Synergy Financial Planning in South Glastonbury, said: “I advise existing clients to focus on short to medium-term bonds and avoid any investments in the name ‘ long-term’.”
According to Alex Doll, financial planner and chairman of Anfield Wealth Management, another area investors should avoid is growth stocks or companies with higher than average expected returns. He said: “Growth stocks often underperform because they expect to make money on future cash flows. When inflation increases, future cash flows will decrease in value.”
Doll takes Tesla as an example. “Tesla is down 20% this year because of a couple of issues,” he said. “But inflation and rising interest rates are an important factor.”
Take advantage of increased costs
As Doll is reducing the exposure of his clients’ investments to growth stocks, he is increasing his allocation to value stocks or companies that trade below the average in the S&P 500. argues: “Value stocks can do better in times of hot inflation.”
That’s because these companies often operate in industries – like finance and consumption, that are less affected by inflation, according to Doll. “These industries tend to perform better because they have pricing power and can raise prices to match inflation trends,” he said.
These businesses are also generally well-established, and investors don’t have to worry too much about their expected growth, he said.
Another suitable investment in the current climate is government bonds against hot inflation (TIPS), said Nicholas Scheibner, an asset management advisor at Baron Financial Group. These securities have the same risks as other bond investments, but their original prices can be adjusted if inflation rises.
Other inflation-defying investments: real estate, gold, and cryptocurrencies
Doll said: “Real estate offers good returns, as homeowners see values increase. Landlords can also pass inflationary pressure on to customers by increasing home prices.”
Investing in cryptocurrencies and gold in the context of hot inflation is effective because these are the types of assets that are not affected when the currency value is reduced. However, experts warn, gold and cryptocurrencies are both highly volatile and should not be allocated more than 5% in a portfolio.
