Keeping your portfolio inflation-proof is essential. Here are 10 important tips about how to keep your portfolio inflation-proof.
When the cost of living rises and the value of your money depreciates, as a result, you’re now holding less value in that same nominal investment.
The Consumer Price Index CPI in the United States recorded a high of 296.31 points in June 2022 compared to a low of 23.50 points in February 1950. However, the Inflation rate for July declined to 8.5% from 9.6%. The one-month decline in the CPI prices is tentative and does not define the economy. The inflationary pressure is going to be there at least till mid-2023, experts said.
After the rate hike in July, the Federal Reserve signalled another aggressive rate hike in December. But the release of the July inflation data later in the month cooled the economy, and there would not be another hike soon as it seems now.
Nevertheless, the economy is unstable due to geo-political uncertainty around the world, including in the USA.
It is necessary to be wise regarding investment and protect your portfolio during high inflation.
Let’s discuss the 10 Best Tips to keep your portfolio Inflation-proof.
1. Keep the purchasing power of your portfolio intact.
A portfolio is a valuable tool for saving and investment. Protecting the portfolio’s purchasing power is essential to remain inflation-proof over time.
As long as Inflation is low, the actual value of your investments will increase over time. This means you can buy more for each dollar you invest by retiring.
If Inflation rises, your portfolio will buy less for each dollar invested. So, keeping some portion of your portfolio in cash makes sense if you want to keep up with prices.
The assets in a portfolio must grow at least as much as its liabilities, including Inflation, over the investment period to preserve purchasing power.
2. Keep your money safe from taxes
When you withdraw from a Roth IRA or 401(k), you are taxed on the total amount. If you let your money sit in cash and lose value, you are only taxed on whatever gains you have in that account during that period.
Few investment options you can consider to save money on taxes.
- Try to invest your long-term capital gains in municipal bonds.
- TIPS – Treasury Inflation-Protected Securities
- Tax-saving Mutual funds
- Start a business,
- Max out your retirement accounts,
- Use a health savings account, and
- Claim tax credits
Finally, always be aware of potential tax consequences when making investment decisions.
Changes in tax law could impact how much money you make from an investment, which could affect how much you can safely invest in that investment without risking loss.
3. Know the basics of Inflation to protect your portfolio from losing value.
When the price of goods and services increases, we call it Inflation. This is when the value of your money is losing purchasing power. That means when you look back at the number of things you could buy at a specific time, you’ll see a lower number.
Inflation is part of the natural process of a growing economy. It happens yearly due to increasing demand for goods and services, which drives prices up. Typically, Inflation happens in spurts, so you’ll see wild inflation rate fluctuations.
4. Diversify your portfolio, and combat Inflation.
Keeping your portfolio diversified is one of the best ways to protect it against Inflation. Stick to a fixed investment mix during inflationary pressure. When you diversify, you hold different investment assets, including stocks, bonds, real estate, and other commodities.
Investing in different sectors in the stock market is also essential to control how your money is growing. If one industry falls short, the stock prices of other sectors in your portfolio will pick up. And since the market trends over time, your overall portfolio should also experience gains.
5. Invest in assets that grow with Inflation
When trying to keep your portfolio inflation-proof, you want to invest in assets that grow with higher than Inflation. In other words, you want to invest in assets that will increase in value as the cost of living increases. It’s important to note that not all purchases are created equal.
While some are good for generating a steady cash flow, others are better for growing your portfolio over time. Some top examples of assets that increase with Inflation include real estate, commodities, and equities. These types of investments experience both appreciation and dividends over time.
As the cost of living rises, you can still earn a healthy return on your investment — even if your money isn’t increasing in value as quickly.
6. Invest in low-cost index funds
Index funds are a great way to keep your portfolio inflation-proof. Investing in a mix of different types of index funds makes you less likely to experience significant fluctuations in the value of your assets. This can help you maintain a consistent return over time, regardless of the stock market’s performance.
7. Don’t forget about bonds to make your portfolio inflation-proof
Although real estate, commodities, and equities are suitable investments to keep your portfolio inflation-proof, you also want to remember to include bonds in your investment mix.
Bonds are a type of investment that generates a consistent cash flow. This can help supplement your investment income on an ongoing basis when one or more of your other investment types are low or not generating a cash flow due to market fluctuations or economic conditions.
Bonds can be risky, but they also have the potential to increase in value over time with higher interest rates. This makes them a good investment to keep your portfolio inflation-proof.
If you’re unsure which types of bonds to invest in, you can always talk with a financial advisor. A good advisor can help you create a personalised investment plan to consider your current financial situation and future goals.
This way, you know you’re making intelligent, strategic decisions with your money and keeping it safe from Inflation.
8. Be careful with currency trading during the inflationary periods
If you’re looking for ways to keep your portfolio inflation-proof, you might come across people recommending that you trade in currencies. This refers to buying and selling currencies, hoping to profit from the fluctuation in their values.
While it’s possible to profit from this practice, it can also be risky, especially if you’re not careful and carry limited knowledge.
Certain assets can be beneficial for keeping your portfolio inflation-proof but also risky. For example, investing in commodities can be a good way to earn money through Inflation. But it can also result in significant losses if the market doesn’t react as expected.
Suppose you’re going to trade in currencies. In that case, you need to be very careful to minimize your risk and protect your portfolio from any unforeseen losses that could occur as a result.
9. Have a financial plan in place that addresses potential threats from inflationary pressures
When investing, you must be aware of potential threats to your portfolio from inflationary pressures. One such threat is that your investments’ value could decrease as the cost of goods and services rises over time.
Create a financial plan addressing potential inflationary pressure threats. This plan should include tips on protecting your portfolio from inflationary pressures, such as investing in assets that will maintain their value even if prices rise over time.
Additionally, keep a tab on prices with the help of automated alerts so that you’re always aware of any changes that could impact your investments’ value.
10. Review your portfolio regularly and keep it inflation-proof.
When Inflation rises, the cost of living also goes up. It can happen gradually or suddenly, making it difficult for investors to protect their portfolios from increased inflation-related risks.
Reviewing your portfolio regularly is one way to mitigate inflation risks and stay ahead of the game.
Another way to keep Inflation in check is to regularly rebalance your portfolio, forcing all assets to reflect relative value changes. Rebalancing helps ensure that your portfolio stays diversified and exposes you to various investments.
Final Words: Don’t lose hope
When you’re trying to keep your portfolio inflation-proof, it can be easy to become discouraged. Don’t lose hope — just because the rising cost of living doesn’t mean your investments have to suffer.
You need to go out there and take advantage of the rising inflation, simply finding investment opportunities in the stock market and other financial assets. That’s how you protect your portfolio against inflation.
To manage your portfolio, you must learn how to make your money work. Consistent participation in the market is the key to managing your risk. If this sounds tiresome, talk to your financial advisor for advice.
You can always take steps to protect your investments and ensure that your money continues growing as expected. Stay on top of market trends and keep yourself abreast with economic news; make the necessary adjustments to your portfolio regularly, and you will be in a good spot to protect your portfolio from Inflation.
Frequently Asked Questions (FAQs):
Energy, Commodities, Health care, Consumer staples and Real Estate are a few other profitable sectors you can consider.
High inflation impacts the economy, including stocks. However, Value Stocks have historically performed well during inflationary periods and Growth Stocks in low inflation environments.
It’s seen in the past that the prices of this yellow metal go up during economic uncertainty.
When inflation is unexpected, lenders suffer the most because the money they are paid back has less purchasing power than the money they originally left. Unanticipated inflation benefits borrowers.
Because the U.S. dollar is the global reserve currency, most countries and companies from other countries need to conduct business in U.S. dollars, making them vulnerable to the value of their currency relative to the U.S. dollar.