Investment Ideas

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>>> As U.S. inflation hits a 39-year high, pros share 7 things to do with your money to help protect yourself from high inflation


Dec. 15, 2021

MarketWatch

By Alisa Wolfson


https://www.marketwatch.com/picks/as-u-s-inflation-hits-a-39-year-high-pros-share-7-things-to-do-with-your-money-to-help-protect-yourself-from-high-inflation-01639577364?siteid=yhoof2


As consumer prices post their biggest yearly gain since 1982, here’s investment advice on TIPS, I bonds, stocks, crypto and more.


U.S. inflation hit a 39-year high in November, according to government data, with consumer prices rising 6.8% in November, as compared to the same month in 2020. This is the fastest rise in consumer prices since 1982, and November was the sixth consecutive month that inflation was over 5%. These changes, no doubt, have many Americans worried about their money — and more specifically, what they can do with their money to help protect against inflation.

“For those that keep their savings in a traditional savings account, it’s unlikely the interest rate they are earning will outpace inflation, and what can happen is inflation can eat into your purchasing power of money as a result,” says Leanna Devinney, certified financial planner and vice president and branch leader of Fidelity Investments. So while you still need an emergency fund (you’ll want at least three months worth of income in there) in savings, investing is going to be key to helping you weather inflation better, pros say. Here’s their advice on where to put your money.

Stocks and diversification are key, says Snigdha Kumar, head of product operations at investment app Digit

Investors should continue to be invested in stocks because they generally hold up better during times of inflation, explains Kumar, who adds that “diversification is our north star.” Suze Orman shared a similar sentiment about stocks recently, noting that: “Bonds and cash struggle to keep pace with inflation; only stocks have a track record of earning more than inflation.”

Consider value stocks in the consumer staples space, says Kumar. “Value stocks that are in the consumer staples space, like food and energy, do well during inflation because demand for staples is inelastic and that gives these companies higher pricing power as they are able to increase their prices with inflation better than other industries,” Kumar says.

Think about TIPS and high-yield bonds, says Devinney

“Consider different types of inflation-resistant fixed income investments such as Treasury Inflation-Protected Securities (TIPS) and high-yield bonds,” says Devinney. Kumar also recommends TIPS. “Since diversification is our north star, one could also acquire some lower risk securities that are inflation linked,” Kumar says. “TIPS securities carry a similar risk as other fixed income investments, but they add an adjusted principal amount if inflation increases.”

Look into I bonds

I bonds are inflation-protected U.S. savings bonds, and I bonds purchased before the end of April offer a 7.12% yield. But, there’s a catch: An individual can only purchase up to $10,000 of I bonds per year electronically or $5,000 in paper. Here’s a guide on I bonds.

Consider crypto, says Michael Wilkerson, executive vice chairman of Helios Fairfax Partners

Wilkerson says Bitcoin and Ethereum provide the most liquid ways to invest in crypto. “This may yet prove to be the most efficient inflation hedge in this environment. Regulatory interference will remain the main risk for the crypto utopia,” says Wilkerson. That said, read this guide on how much of your portfolio to put in crypto.

Consider alternative investments like gold and real estate, says Kumar. In the theme of diversification, Kumar says she always suggests having 5% to 10% of a portfolio in alternatives or hedges, like gold and real estate, during inflation. “The rationale for buying gold is that its asset value isn’t damaged by the eroding value of cash so it’s a good anti-inflationary hedge,” Kumar says. “Real-estate platforms, especially retail real estate, do well during inflation because landlords and property owners see the value of their property increase,” she says, noting that: “We’re already seeing that in the real estate market in the United States right now.” For his part, Warren Buffett has also spoken of real estate as something to consider to hedge against inflation.

Reduce exposure to certain types of investments, says Devinney
“It may also help to reduce exposure to investments that are more sensitive to inflation such as certain Treasury bonds. Treasury bonds typically have lower yields than the equivalent duration investment grade bonds and that is why treasury bonds aren’t as inflation resistant,” says Devinney. You may also want to steer clear or some CDs, savings accounts and more.

And Kumar doesn’t recommend investing too much in growth stocks during times of inflation because those companies expect to earn a bulk of their cash flow in the future. As inflation increases, those future cash flows are worth less and therefore they lose stock value.

And finally, you should do an honest review of your expenses. Kelly LaVigne, vice president of consumer insights at Allianz Life, says most people think they can combat rising costs simply by cutting back on some aspect of their current expenses, but it’s impossible to do this in a logical way without a clear understanding of what you’re currently spending. “You might think you can make an impact by spending less on a few grocery items or limiting daily trips to the coffee shop, but those might be relatively useless endeavors if you are paying significantly more in other places where inflation is taking a bigger chunk of your budget,” says LaVigne.

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