Per the dictionary, inflation is “a rise in the general level of prices resulting in the loss of value of the currency.” In other words, inflation decreases the real value of our financial holding. Extreme inflation is destructive.
To quickly illustrate the impact, let’s say gas was $4 per gallon on average a year ago, and it’s $6 per gallon on average today. The increase in average prices is inflation. The same $4 a year ago can’t get a gallon of gas today.
Inflation is problematic for a simple reason. It eats away the return on the financial portfolio and puts us a few steps back if the financial portfolio does not grow faster.
We are living in a high inflationary environment today. In October 2021, consumer prices rose 6% compared to the prior year, with the highest inflation rate in the U.S. over three decades. It’s incredibly high.
So, what can you do in light of high inflationary times such as today? There are some key concepts to keep in mind.
If we want the financial portfolio to grow, the portfolio needs to have a healthy mix of growth and appreciation-focused investments and minimize fixed-income assets. Growth investments include stocks and cryptocurrencies that have the potential for value appreciation. Fixed-income assets include cash and financial products that pay you a fixed fee. These fixed-income assets’ values erode rapidly in high inflationary times. While these are generalizations, this concept is to have assets that can grow or assets that are not locked in a fixed rate.
The assets that can help include the following.
Stocks returns have historically beaten inflation, and certain companies are further fueled by inflation. Some industries, such as utilities, defense, and raw materials, have done exceptionally well in historical inflationary periods. It is worth considering leaning the portfolio towards those end markets while keeping a broad diversification.
Physical assets, such as real estate, gold, and commodities, have historically performed alongside inflation. These tangible assets have fundamental value and are often necessities to our society. Therefore, the value of these assets moves along with inflation.
It’s time to review the current portfolio to ensure that the overall return profile still makes sense given the existing environment.
Disclaimer: The contents of this website is an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.