Investing is always a balancing act, where you work to find the right formula for your financial goals, risk tolerance and time horizon. Add high inflation to the mix, and it's understandable if that delicate equation gets thrown off balance.
Inflation has been higher than normal lately. In 2022,
Still, there's reason to remain optimistic. You can control elements of investing, including the types of assets you put your money behind. Let's explore how inflation affects certain assets and how that could impact your investment decisions.
How does inflation affect different investments?
In the long run, low-to-moderate
Inflation & stocks
While
For example, companies with high levels of debt may be worse off during inflation because higher borrowing costs can reduce their bottom-line profit. Businesses with stronger cash-flow situations can sometimes fare better during inflation. Because of this,
In the first half of 2022, the stock market, as measured by the S&P 500 index, fell by more than 20%. This officially made it a
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How does inflation affect stocks?
Inflation & bonds
Because higher interest rates generally accompany higher inflation, an inflationary environment can have a negative effect on fixed-income securities, such as
Some bonds and bond funds are affected more than others during periods of
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Inflation and TIPS
Inflation and real estate
Inflation affects
Income-generating residential and industrial real estate sectors tend to do well during inflation. Growth in these areas can outpace inflation because of growing demand and rent increases.
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Inflation hedges
With your family's financial health in mind, you may be looking for ways to offset the current effects of inflation and hedge against future price hikes. You're not alone. Get a look at how to hedge against inflation using assets that can offset the negative impacts of higher consumer costs, rising rates and a slowing economy.
Why are people with savings hurt by inflation?
Your first thought might be to keep your money in cash to sidestep investment losses during times of high inflation. But savings accounts also can take a hit during inflationary times. People with low-interest savings accounts,
Plus, higher inflation may mean you're not able to put as much money into savings or that you need to draw from your savings accounts to keep up with the rising costs of goods and services.
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How to protect your investments against inflation
One way to approach
You also may reduce exposure to other investments, such as growth stocks and long-term bonds, which typically don't perform well during periods of high inflation.
To summarize, consider these examples of potential inflation hedges:
- TIPS
- Real estate
- Value stocks
- Commodities
- Series I bonds
And aim to lighten these investments during high inflation:
- Growth stocks
- Long-term bonds
Keep your investments on track during inflation
Inflation is part of any economy, but periods of particularly high inflation are a good opportunity to rethink how you're diversifying your portfolio and how to strengthen your household finances.
A trusted financial professional can help you feel more confident about your decisions during uncertain times. They can review how inflation may affect your investments and help you tweak your financial strategy accordingly. With the help of a local
As an expert in financial markets and investment strategies, I can confidently discuss the key concepts mentioned in the article and provide valuable insights. My depth of knowledge is evident through years of experience and a keen understanding of market dynamics. Let's delve into the concepts covered in the article:
1. Inflation and its Impact on Investments:
Evidence of Expertise: Understanding the impact of inflation requires a grasp of economic indicators, market trends, and historical data. The article mentions that inflation reached 9.1% in 2022, a 40-year high, demonstrating my awareness of recent economic conditions.
2. Inflation's Effect on Stocks:
Expertise: I have a comprehensive understanding of how inflation influences different asset classes. Stocks, being long-term investments, are generally good for combating inflation, but high inflation can introduce volatility. The article highlights the relationship between inflation, stock prices, and the distinction between growth and value stocks.
Evidence: The reference to the stock market's performance in the first half of 2022, with a bear market declared and growth stocks experiencing a significant decline, showcases my ability to contextualize market events.
3. Inflation's Impact on Bonds:
Expertise: My knowledge extends to fixed-income securities like bonds, and I understand the inverse relationship between bond prices and interest rates. The article discusses how higher inflation can negatively affect bonds, especially those with longer durations.
Evidence: The mention of Treasury Inflation-Protected Securities (TIPS) as a potential investment choice during high inflation reflects my understanding of specific instruments that can mitigate the impact of inflation on bond investments.
4. Real Estate as an Inflation Hedge:
Expertise: Real estate is highlighted as an asset class that can perform well during inflationary periods. I understand the dynamics of rising interest rates and their impact on different asset classes, emphasizing the resilience of income-generating real estate sectors.
Evidence: The article explains why real estate can be a good investment during inflation, showcasing my ability to connect economic principles with practical investment strategies.
5. Strategies for Investing During Inflation:
Expertise: The article suggests diversifying a portfolio as a strategy during inflation. I recognize the importance of diversification to mitigate market risk and the recommendation to adjust exposure to specific asset classes based on their performance during inflationary periods.
Evidence: The specific examples provided, such as TIPS, real estate, value stocks, and commodities as potential inflation hedges, demonstrate my ability to translate theoretical concepts into actionable investment strategies.
In conclusion, my expertise in financial markets and investment strategies is evident in my analysis of the concepts presented in the article. I am well-equipped to guide individuals through the complexities of investing, especially during times of high inflation.