Are you worried about inflation? Inflation increased at the fastest rate in over 12 years. The Consumer Price Index (CPI) rose 4.2% compared to same period last year. The Fed and many economists are dismissing the current inflation as transitory. But not everyone agrees that the current inflation is temporary limited. If there is an extended run of inflation, it could raise your cost of living, dip into your investment returns and increase the cost of borrowing.
So, if you worry over inflation than protect your portfolio and add/increase the following 5 asset classes in your overall, diversified portfolio:
1. Gold
Gold is the most traditional hedge against inflation. Long-term investors, should allocate a small portion of gold (3%-5%) in their portfolio.
2. Commodities
Commodities are a broader category that includes all different kind of investments such as grain, precious metals, oil, cattle, coffee or orange juice among many others. Inflation and commodities have a unique relationship because commodities are an indicator of inflation to come. As the price of a commodity rises, so does the price of the final product. You can invest in commodities via EFTs such as the S&P GSCI Commodity Total Return Index, which delivered positive inflation-adjusted returns in 83% of the high and rising inflation periods.
3. Value Stocks
Value stocks tend to perform better during inflation because these companies are usually in industries such as the financial and consumer staples sectors, which are usually not hit as hard by inflation.
4. Real Estate
Consider real estate investment trusts (REITs), which are companies that own and operate income-producing real estate or physical properties.
Real estate are a good inflation hedge because as inflation rises, so do property values. Landlords can charge more for rent, earning higher rental income over time, which helps keep pace with rising inflation. REITs consist of a pool of real estate that pays out dividends to its investors.
5. TIPS
If you are close to retirement and are worried about the eroding value of your savings, TIPS (Treasury inflation-protected securities) are a great hedge against inflation. Like traditional Treasury bonds, TIPS are issued and backed by the U.S. government. TIPS come with an inflation protection via a yearly adjusted par value that is determined based on the consumer price index. This changing, yearly value is designed to help TIPS maintain purchasing power. TIPS are best for short-term needs (up to 3 years).
Diversification is key. An ideal portfolio combines all of these asset classes to deliver best protection from inflation.
Sven Franssen