After an extended period of very low inflation, 2021 welcomed:
- The broad distribution of the COVID vaccine
- Additional stimulus
- A booming economy
- Supply chain issues
- A tight job market, and
- The first signs of above-average inflation
The latter issue was compounded in early 2022 by the Omicron COVID variant, which caused worker shortages as illness and mandated quarantines spread throughout the country. Investors want to prepare for the road ahead, which could include even more inflation.
At Moneta, we commonly implement four strategies to protect the portfolio:
- First, we want to maintain a healthy allocation to diversified stock investments which provides returns higher than inflation over time.
- Second, we want to retain enough cash for anticipated and extraordinary cash needs but not much more.
- We may complement traditional fixed income with high yield bond investments.
- Lastly, some investors incorporate real estate, infrastructure, or Master Limited Partnerships into the portfolio for inflation hedge.
Two more strategies are often used by investors as inflation hedges but a word of caution should be noted.
- Commodities (gold, oil, soybeans etc.) may do well as prices increase but are extremely volatile and may be too risky for many investors.
- Treasury Inflation Protected Securities (or TIPS) were designed to protect against inflation. However, these bonds are currently expensive and incorporate a high expectation for inflation. If inflation turns out to be lower than the market expects, an investor may suffer small losses in these bonds even when held to maturity.
At Moneta, we strive to build all weather portfolios that outpace inflation over time. If you have more financial questions, don’t hesitate to ask your Family CFO. We do more so you can too.
© 2022 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.