“While cash isn’t a growth asset, it will typically stay up with inflation in nominal terms if inflation is accompanied by rising short-term interest rates,” she continues.
CFP and founder of Dare to Dream Financial Planning Anna N’Jie-Konte agrees. With the epidemic demonstrating how volatile the economy can be, N’Jie-Konte advises maintaining some money in a high-yield savings account, money market account, or CD at all times.
“Having too much wealth is an underappreciated risk to one’s financial well-being,” she adds. N’Jie-Konte advises single-income households to lay up six to nine months of cash, and two-income households to set aside six months of cash.
Lassus recommends that you keep your short-term CDs until we have a better idea of what longer-term inflation might look like.
How can you keep your money safe from inflation?
The most effective approach to avoid inflation is to invest your savings for a higher return than money market or savings accounts can provide. Investing in almost anything else carries a higher risk than an FDIC-insured account. You can, however, select assets that are suitable for your risk tolerance.
What investments do well in the face of inflation?
- In the past, tangible assets such as real estate and commodities were seen to be inflation hedges.
- Certain sector stocks, inflation-indexed bonds, and securitized debt are examples of specialty securities that can keep a portfolio’s buying power.
- Direct and indirect investments in inflation-sensitive investments are available in a variety of ways.
Are stocks an effective inflation hedge?
You might not think of a house as a smart method to protect yourself against inflation, but if you buy it with a mortgage, it can be a great way to do so. With a long-term mortgage, you may lock in affordable financing for up to three decades at near-historically low rates.
A fixed-rate mortgage allows you to keep the majority of your housing costs in one payment. Property taxes will increase, and other costs will climb, but your monthly housing payment will remain the same. If you’re renting, that’s definitely not the case.
And, of course, owning a home entails the possibility of its value rising over time. Price appreciation is possible if additional money enters the market.
Stocks
Stocks are a solid long-term inflation hedge, even though they may be battered by nervous investors in the near term as their concerns grow. However, not all stocks are equivalent in terms of inflation protection. You’ll want to seek for organizations with pricing power, which means they can raise prices on their clients as their own costs grow.
And if a company’s profits increase over time, so should its stock price. While inflation fears may affect the stock market, the top companies are able to weather the storm thanks to their superior economics.
Gold
When inflation rises or interest rates are extremely low, gold has traditionally been a safe-haven asset for investors. When real interest rates that is, the reported rate of interest minus the inflation rate go below zero, gold tends to do well. During difficult economic times, investors often look to gold as a store of value, and it has served this purpose for a long time.
One effective way to invest in gold is to acquire it through an exchange-traded fund (ETF). This way, you won’t have to own and protect the gold yourself. Plus, ETFs provide you the option of owning actual gold or equities of gold miners, which can provide a bigger return if gold prices rise.
How will you protect yourself from inflation in 2022?
During the epidemic, there was a surge in demand for products and labor, resulting in the fastest rate of consumer price and wage inflation since the early 1990s. As the pandemic passes and spending moves toward services rather than products, we believe inflation will reduce due to greater labor supply. In the end, it should not jeopardize our base case scenario, which predicts a significantly more vibrant cycle in the 2020s than we experienced in the 2010s.
However, both prices and salaries are expected to rise at a pretty rapid pace. We believe there are three ways for investors to navigate this climate.
Look to real estate for inflation protection
Because leases are regularly reset higher, real estate investors often profit from a natural inflation hedge. Furthermore, we believe the residential and industrial real estate sectors will benefit from strong structural tailwinds. Following the global financial crisis, chronic underbuilding (compared to trend) resulted in a housing shortage in the United States. Workers’ labor is in high demand, and earnings are rising, ensuring that housing remains cheap even as home prices rise. Migration enabled by remote work is also offering opportunities.
The global trend toward e-commerce will demand additional warehouses, storage, and logistics in the industrial sector. The need for further investment is highlighted by problems in the global supply chain that became apparent in 2021. We’re also seeing an increase in demand for life science research facilities. While we prefer to invest in real estate through private markets, publicly traded real estate investment trusts (REITs) have outperformed other equities sectors during periods of rising inflation. In a nutshell, real estate is our favourite option to invest in a higher-inflation climate.
Rely on equities, especially cyclical ones, to drive capital appreciation.
While economists dispute the complexities of inflation, the fundamental principles underlying the current phase appear to be clear: Strong demand and economic growth are driving inflation. Because corporate earnings are also good in inflationary settings, equities tend to do well. We anticipate that stocks of companies that are more closely linked to economic activity and interest rates will likely outperform. Bank stock valuations, for example, have generally been linked to inflation forecasts. In cyclical industries like industrials and commodities, companies with pricing power could see strong revenue increases. Stocks that do well when growth and inflation are rare (think the digital economy) may, on the other hand, be at more risk. In our opinion, you should maintain a fair balance between the two categories, and expect a hard environment for fixed income portfolios as interest rates climb.
Avoid excess cash, and consider borrowing.
In our Long-Term Capital Market Assumptions, 80 percent of the assets we consider have a higher predicted return than inflation. Investing surplus cash in a portfolio that meets your goals and time horizon is the simplest approach to protect purchasing power. Borrowing may be prudent in the current situation. Interest rates remain low, particularly when compared to inflation. A mortgage is a straightforward approach to profit from a healthy home market. If the Federal Reserve reacts to rising inflation by boosting interest rates, borrowing expenses may become less appealing.
Key takeaways
Higher inflation is likely to persist through 2022, but it does not have to be a reason for alarm. Investors can create a portfolio that considers inflation risks and attempts to manage them. While excess cash appears unappealing, relying on equities rather than fixed income and focusing on cyclical sectors and real estate could prove to be profitable strategies. Meanwhile, while policy interest rates are still low, borrowing and settling existing liabilities may be prudent.
In the context of your individual circumstances and aspirations, your J.P. Morgan team can provide you with more information on how the present environment is influencing risk and return possibilities.
Is gold a good inflation hedge?
- Gold is sometimes touted as a hedge against inflation, as its value rises when the dollar’s purchase power diminishes.
- Government bonds, on the other hand, are more secure and have been demonstrated to pay greater rates as inflation rises, and Treasury TIPS include built-in inflation protection.
- For most investors, ETFs that invest in gold while also holding Treasuries may be the best option.
What do you do with your money when prices rise?
As a result, we sought advice from experts on how consumers should approach investing and saving during this period of rising inflation.
Invest wisely in your company’s retirement plan as well as a brokerage account.
What is creating 2021 inflation?
As fractured supply chains combined with increased consumer demand for secondhand vehicles and construction materials, 2021 saw the fastest annual price rise since the early 1980s.