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Inflation rose for more than 10 years in June, and news worried investors.
This is because rising prices can erode portfolio profits. It’s just that as the cost of living rises, so does your income.
This is a particularly difficult challenge for retirees, who can rely heavily on their return on investment to pay their bills while young people still have a salary. And here is the fact that inflation can force the Federal Reserve to raise interest rates, which is bad for equity.
“Overall, inflation is usually negative for stocks,” said Amy Arnott, Morningstar portfolio strategist.
He pointed out the story. From 1973 to 1981, inflation increased by more than 9% per year. During the same period, the shares decreased by about 4% annually.
But do not panic. Doing so has never helped the investor.
First of all, we do not yet know whether the price increase will become commonplace or whether it is just a temporary result of the nation ակից’s one-year blockade և restrictions.
In any case, history shows that stocks outperform inflation in the long run.
Average annual stock returns were about 11% from 1900 to 2017, according to Steve Hanke, a professor of applied economics at Johns ounce Hopkins University in Baltimore.
After deducting the value of inflation, that average annual income remains a nice 8%.
However, there are some steps investors can take to protect their money from inflation and even benefit from the environment, say financial advisers.
How to take advantage of price increases?
Alex Dole, certified financial planner and president of Anfield Wealth Management in Cleveland, is retracting the influence of his clients’ growth stocks. And it increases their placement in equity stocks or companies that trade at below-average interest rates on the S&P 500.
“Value stocks may perform a little better in times of inflation,” Dolk said.
This is due to the fact that these companies are often in industries such as the main financial and consumer sectors, which are less affected by inflation, says Doll. “Inflation is better than other industries.”
“These companies are usually already well-established,” he said, “so there is no need to worry so much that their expected growth will weaken.”
Another good bet for investors concerned about inflation is treasury-backed securities, or TIPS, says Nicholas Scheibner, a wealth management consultant at Baron Financial Group in Fair Earsey, New York.
These securities bear the same risk as other fixed income investments, but it adds an adjusted principal amount if inflation rises.
Other hedges of inflation include investing in real estate, gold and even cryptocurrencies, consultants say.
“Real estate works well as homeowners and homeowners see their property values rise,” Dolk said. “Landlords can transfer rent increases to some extent easily.”
The argument for investing in cryptocurrencies or gold in the face of inflation is that those assets are not affected by the declining value of cash.
However, both are very volatile – they should not make up more than 5% of your portfolio, experts warn.
Investing to avoid inflation
Because interest rates can be expected from the Fed, experts now advise you not to associate too much of your money with any longer-term bonds or certificates of deposit. Doing so may result in you missing out on higher rates.
“I currently advise clients to focus on short-term, medium-term bonds, and avoid ‘long-term’ investments in that name,” said Doug Belfin, CFP agent for Synergy Financial Planning in Connecticut, South Glastonbury.
“Another area you can stay away from is growth stocks or above-average companies,” Dole said.
“Growth stocks tend to perform worse as they expect to gain a major share of their cash flow in the future,” Dolk said. “And as inflation rises, future cash flows are less valuable.”