Stay Ahead of Inflation

Inflation can be bad news for investors. Because it’s a process of rising prices on goods and services, it means today's dollar won't buy as much down the road. In other words, it reduces your future purchasing power. That's why it's important to think about different types of investments that give your portfolio the potential to generate higher returns than the rate of inflation.

It’s a tricky balance. If you invest too aggressively on a short-time horizon, you risk losing money that you’ll need for the future. But if you invest too conservatively, your money may not grow enough. Finding the right balance is key to staying ahead of inflation.

What Causes Inflation?

Many forces can trigger inflation. Tactics policymakers use to stimulate near-term economic growth is one key source that financial news sites often talk about. For example, low interest rates and high levels of government spending can cause demand for goods and services to exceed supply, which ultimately drives prices higher if left unchecked.


Tracking Price Changes

One well-known way to measure inflation is with the Consumer Price Index (CPI). The Bureau of Labor Statistics (BLS) tracks price changes on thousands of goods and services and every month calculates a weighted average—meaning the categories that people spend the most money in have bigger weights in the calculation—so housing has a bigger role than recreation.

The BLS publishes numerous indices each month. People pay a lot of attention to the Core CPI, which excludes the food and energy categories that tend to have large price swings. Headline CPI includes food and energy and is the index used to calculate many benefit payments, including Social Security.

Inflation Can Change Unexpectedly
U.S. Inflation (Year Over Year)

Headline Consumer Price Index from 1/31/1960 to 2/28/2021. Source: Bloomberg.

How Inflation Can Affect Your Savings

Consider this: Over the last 25 years, inflation has averaged 2.2%.* Even that moderate rate decreases what a dollar can buy over time. For example, a car tire that cost $100 in 1995 would cost approximately $176 today.**

Of course, the higher the rate of inflation, the less your dollars will be able to purchase in the future. That’s a big concern for investors.

Source: American Century Investments.

What You Can Do to Stay Ahead of Inflation

Assess the Threat of Inflation

A little inflation is actually healthy for a growing economy. Problems arise when people’s incomes do not keep up with rising costs. The Federal Reserve seeks to keep prices for goods and services under control. It has determined that the economy can tolerate an inflation rate of about 2%.

Inflation has been low for the past several years, but now it's facing pressure on three fronts. Because there are many influences at play, it's impossible to predict inflation outcomes. We believe a modest, permanent allocation to inflation-fighting investments can be beneficial.

Know Your Inflation-Fighting Options

When you are younger, you might keep your portfolio ahead of inflation with the higher return potential of equity investments because you can tolerate their higher risk and you have time to recover from downturns. Real estate investment trusts (REITs) and commodities (precious metals, oil and natural resource-related products) are often called inflation hedges because of their potential to mitigate different sources of rising costs. 

The closer you are to needing your money, however, the more you need to think about preserving what you have. After all, you're probably planning on your money lasting 20-30 years—and over a time when you've stopped making regular contributions that could help offset declines in value. Investments in Treasury inflation-protected securities (TIPS) are aimed at combating this problem because they are bonds that seek to outpace inflation.

How Much Should You Invest in Inflation Hedges?

There is no “right” amount because a combination of factors are at play. You want to think about your objective, risk tolerance and time horizon when determining how much to invest in inflation-hedging assets.

How Different Investors Can Have Different Concerns

Sue Smith Bob and Rose Stevens
Age 35 In their mid-60s and recently retired
Has a small IRA and recently started 401(k) contributions In addition to Social Security, they have $500,000 in IRA accounts and Rose has a small pension
Main goal is to save for retirement Main goal is to travel
Aggressive portfolioA primarily invested in stock mutual funds Conservative portfolioB mostly in high-quality bond mutual funds with a small portion in a dividend-paying stock fund
Concern about near-term inflation: Low
Concern about long-term inflation: High
Concern about near-term inflation: High
Concern about long-term inflation: High

AAggressive portfolios typically hold more stocks with less in bonds and cash.

BConservative portfolios typically hold more cash and bond investments and less stocks.

Ways to Invest in Inflation-Fighting Assets

When you've determined how inflation could affect your portfolio, there are two investing approaches to consider, depending on how you want to manage your investments and how your portfolio is currently positioned.

You Choose One, Diversified Portfolio

Are you looking for a professionally managed portfolio with a broad mix of investments, including inflation-hedging components? Our time-based and risk-based asset allocation portfolios combine stock, bond and short-term securities in a single fund.

You Build Your Portfolio

Do you prefer buying individual stock and bond funds that complement your current portfolio? We have a range of funds that you can mix and match to add to your existing diversified portfolio.

Fixed-Income Funds:

Equity Funds: 

More Resources for You

What about rising interest rates? Learn about interest rate risk

Get the latest views on inflation and the bond market from our fixed-income experts. 

We Can Help

We understand each investor is unique, and your needs may vary. Our goal is to help you, no matter what your investing style, time horizon or needs.

Whether you’d like more information on potential investments or have questions you need answered now, take advantage of our expertise by scheduling a free consultation. Or call us at 888-345-2441.

Ready to Fight Inflation?

Call us to learn more about combating inflation risk in your portfolio.

*Data as of 2/28/2021. Source: Bloomberg.

**Source: CPI Inflation Calculator , U.S. Bureau of Labor Statistics. Data as of 3/31/2021.

Diversification does not assure a profit nor does it protect against loss of principal.

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.