Is Your Portfolio Ready for Inflation?
When rising prices start affecting your budget, you might be tempted to take another look at your day-to-day expenses. But inflation can also affect how you save and invest for the future—are you prepared?
Inflation’s Effects
Before the recent spike, inflation had previously averaged around 2% a year for the past decade. But with the rate still above that average,* inflation will cut into the future purchasing power of your savings. You’ll also need to account for real returns, that is, your investment returns adjusted for the higher rate of inflation, to ensure you can still meet your investment goals.
Your Inflation Goal
You’ll need to evaluate your current portfolio plan to determine your next steps. Will you try to break even so the inflation rate doesn’t cut into your returns? Do you need a certain amount of income? Do you already have inflation hedges built into your portfolio?
Answer a few questions to help focus your inflation efforts.
What’s Your Investing Time Frame?
Inflation Concerns: Medium to High
Pension payments or other fixed income sources might not rise with inflation.
More conservative investments (like bonds) can be more sensitive to inflation.
A current nest egg could be depleted faster when prices for necessities are rising.
Inflation Concerns: Medium to High
Investing heavily in stocks can potentially outpace inflation but increases market risk when there’s less time to recover from a downturn.
Investing mostly in bonds or cash equivalents may avoid major market risk but may not keep up with inflation.
Inflation Concerns: Low to Medium
Rising prices tend to affect individuals’ short-term budgets more than their long-term investments.
Younger investors have more time to overcome the effects of inflation and market volatility.
With a longer time frame, these investors can often tolerate a higher percentage of stocks, which may help keep their portfolios growing ahead of inflation.
Source: American Century Investments. The examples indicate general inflation scenarios and do not account for your individual circumstances.
What’s Your Stock/Bond Investment Mix?
Inflation Concerns: High
When inflation rises, bond prices tend to fall.
An exception: Inflation-adjusted bonds (such as Treasury inflation-protected securities, or TIPS) are linked to the inflation rate.
Without a stock allocation, a bond portfolio might not provide the growth potential needed to stay ahead of inflation.
Inflation Concerns: Low to Medium
A portfolio of stocks and bonds may help weather market ups and downs but still may not account for inflation risk.
Potential inflation hedges include Treasury inflation-protected securities (TIPS), commodities, gold and real estate.
Inflation Concerns: Low to Medium
The long-term growth potential of stocks may outpace the inflation rate but can leave investors vulnerable to market downturns.
All stocks are not created equal: Some could be better positioned for downside risk or offer pricing power during higher inflation.
Don’t see a good representation of your portfolio?
Let’s talk about what inflation could mean for your situation.
What’s Your General Plan to Handle Inflation?
Source: U.S. Bureau of Labor Statistics. Data as of July 17, 2023.
Generally, as interest rates rise, the value of the bonds held in the fund will decline. The opposite is true when interest rates decline.
Diversification does not assure a profit nor does it protect against loss of principal.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.