You’re probably already paying exorbitant gas prices, and you’ve noticed a few hundred-dollar or more price increases on many of your favorite grocery brands.
You’ve probably noticed that your investment accounts haven’t delivered the returns you’re hoping for and that virtually everything you buy is going up in price. And you’ve seen the value of many stocks drop during a volatile market year.
In fact, the total consumer price increase from January to March is 8.5%. This is the highest inflation rate since 1981.
With inflation and uncertainty at the top of the agenda, whether you’re tracking your portfolio’s performance on a daily or monthly basis, you may be wondering if it’s time to rethink your investment strategy.
It can be difficult to swallow stock losses as the market responds to higher prices, the lingering effects of the pandemic, and global turmoil, especially when you’re also feeling the pressure of not seeing your money go as far as you once did.
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Should You Adjust Your Investments if Inflation is Bad?
Yes, but not all the time. “If you have a diversified portfolio, you already factor in inflation,” says Ramit Sethi founder and CEO of I will teach you to be rich.
But what does that mean and how do you know if your portfolio is well-balanced?
How could inflation affect your investment portfolio?
Stock prices tend to increase over a long period of time, even though the market may fluctuate on a daily basis.
This means that a diversified portfolio, invested in balanced indexes or mutual funds, can reduce the impact of inflation.
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In Sethi’s view, simple target-date funds (also known as index funds) tend to outperform inflation over long periods of time.
Index funds can be used to passively follow the performance of a broad index, like the S&P500 or the Nasdaq 100.
A target-date fund, on the other hand, is a mutual fund that adjusts your risk exposure as your expected retirement date approaches.
For example, if you plan to retire in three decades, a target-date fund would gradually and automatically shift more of your investments out of equities, which offer high growth/risk potential, and into bonds, which offer lower but more consistent returns.
If your goals are long-term, unplanned and unpredictable events, such as inflation, should not disrupt your long-term investment strategy.
Even in times of inflation, a well-balanced portfolio will help you avoid missing out on potential market growth.
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With inflation at a record high, you may be wondering whether to increase your investments, take money out of stocks, look for alternatives, or stop any new purchases altogether.
Your response depends on the performance of the rest of your budget. With prices going up everywhere, you may need to cut one or more expenses.
If you’ve already cut back on non-essential spending and increased your savings on current expenses, you may want to lower your investment goals on a monthly or quarterly basis.
On the other hand, if you’ve built up a large portfolio, it may be time to rethink your investment strategy.
Reducing your contributions could affect the amount of matching funds your employer gives you, such as if you’re contributing to a 401 (k) and get a business match. Doing so would be tantamount to throwing money away.
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Similar to retirement savings accounts, many retirement accounts offer tax benefits that can help you save in the short term.
For example, if you reduce your regular IRA contributions or health savings accounts, you may face higher tax penalties and a less likely long-term return on your investment.
On the other hand, you may want to set aside more of your income for saving if rising expenses are making it difficult for you to cover your day-to-day expenses.
To ensure you have enough money set aside to cover the growing costs of your current obligations, increase your emergency fund, according to Gopaul.
Consider alternative investments for inflation hedging
In light of the current climate, consider options that aren’t tied to Wall Street or that have a track record of beating inflation. Consider industries that supply food and gasoline that people still rely on despite rising prices.
For example, when inflation is high, real estate and land investments tend to perform well as home prices rise and rental rates increase.
Commodities such as metals, oil, and agricultural products are often recommended by investing gurus as inflation hedges. However, they understand the relative risk associated with these commodities due to the dynamic nature of supply and demand.
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Then there are TIPS investments, which try to match the returns with the current inflation rate. The best people to invest in TIPS are those who have a balanced portfolio and plan to hold the TIPS for at least one year.
Gopaul thought TIPS might be a good investment for people who have money to spare. TIPS offers a higher return than short-term certificates of deposit (CDs), money market rates (MMs), and savings rates.
Some investors might want to wait a year or more before selling their TIPS. The best way to manage inflation is to stay focused on long-term goals, stick to a well-thought-out investment plan, avoid overpricing, and complete existing purchases.