Inflation has been very low and stable for the last 50 years, but the recent rise in consumer prices has many predicting that we are entering a period of inflation. The last time we experienced substantial inflation was in the 1970s and again in the mid-2000s, albeit milder. Many investors don’t remember these times or have just not experienced investing during a time of high inflation. All the recent headlines on this topic may have you concerned about the impact to your investment portfolio as prices and the cost of living rise, especially if you are retired or plan to do so soon.
It’s difficult to predict with much certainty what’s going to happen with the market because there are so many variables and unknowns. As a general rule, you should make sure your portfolio is made up of investments that are broadly diversified across asset classes. Assuming this recommendation is followed, you may not need to do anything else to your portfolio. Historically, if inflation occurs and the economy is growing it doesn’t negatively impact stocks, however if the economy is not growing then it might hurt them. If you are worried about what will happen to your portfolio if inflation takes hold, there are some asset classes and sectors that have held up well during past periods of high inflation. You may want to review your portfolio for the following asset classes and sectors.
Inflation-resistant stock sectors
There are certain sectors of the stock market that have inflation-resistant characteristics. These sectors include companies that can generally pass their rising costs on to consumers because they provide nondiscretionary products or services. A few of these sectors are consumer staples, energy, and healthcare.
Consumer staples—The consumer staples sector includes companies that produce products that people will continue to buy even as prices go up. Some examples of these products include food, beverages, soaps, toiletries, and tobacco. Consumers will continue to buy them even as prices increase because they are considered necessities.
Energy—Companies in this sector are involved in the exploration and production of energy products such as oil, natural gas, and coal. These stocks have consistently done well during past periods of inflation. Like consumer staples, people need energy to live and will continue paying for it even as prices rise.
Healthcare—Companies that provide medical health care products, services, technology, or equipment are generally considered to be a hedge against inflation because the demand is nondiscretionary. This sector has also been known to perform well in times of inflation.
A couple funds for these sectors to consider include:
Vanguard Consumer Staples Index Fund (VDC)
Utilities Select Sector SPDR Fund (XLU)
Inflation-resistant asset classes
Real assets—The real assets class includes real estate and infrastructure. Real estate is a well-known hedge against inflation because property values tend to rise with inflation. In addition, the properties that are owned by real estate companies benefit from rising prices because rents that are charged can also be raised as tenant turn-over occurs. Likewise, infrastructure companies, which provide goods and services people rely on to live, work, and travel, can easily pass the increase in prices to consumers.
A couple funds to consider include:
Fidelity MSCI Real Estate Index (FREL)
Legg Mason Global Infrastructure (INFR)
Treasury inflation-protected securities (TIPs)—These are bonds issued by the U.S government that are indexed to inflation, so they offer the holder protection during times of inflation. The value of a TIP increases with inflation and decreases with deflation. They pay a fixed rate of interest which is also adjusted for inflation since it is based off the current inflation-adjusted value of the TIP. These investments are also very low risk because they are backed by the U.S. Government.
A TIP fund to consider:
SPDR Bloomberg Barclays 1-10 Year TIPS (TIPX)
Commodities
This asset class has historically been a very reliable hedge against inflation. It includes metals, oil, gas, and agricultural products which respond very quickly to changes in supply and demand. Some assets within this class can be quite volatile, such as agriculture, and are less suitable as a store of value. However, there are a couple to consider.
Natural resources—These include anything that is mined or collected in raw form. Some examples of natural resources include water, timber, alternative energy, and metals. The prices of these products will rise with inflation which makes them a good option for your portfolio.
Gold—This asset is widely considered to be a hedge against inflation because its price has an inverse relationship with the U.S. dollar. If the value of the U.S. dollar weakens, which is what happens during inflation, the price of gold generally rises. It is also a safe-haven asset that investors will flock to for a store of value during uncertain times.
A couple funds to consider:
Invesco Water Resources (PHO)
PDR Gold MiniShares (GLDM)
Cryptocurrency
Due to the rise in popularity of cryptocurrencies, I thought they were worth mentioning. Some believe they are creating competition with gold as a store of value because they share many characteristics with it. Bitcoin is currently the most well-known and popular cryptocurrency because it is scarce, cannot be counterfeited, and is easily exchanged. Cryptocurrencies are becoming more accepted by investors; however, due to their extreme volatility and the ongoing debate about their ability to eventually replace gold as a store of value, they should be treated as a speculative investment for now.
We may very well be entering a period of inflation, but that does not mean you need to start worrying about your investment portfolio. Make sure it is broadly diversified across asset classes and if you are particularly worried about inflation, you can consider adjustments to your portfolio using the investing ideas discussed above.
