High inflation readings are hurting consumers, and they have also sent investors scrambling to ensure that their portfolios are protected against the ravages of higher costs.
Investments that pay a fixed interest rate, such as CDs and bonds, are the most vulnerable to inflation, because it erodes the purchasing power of the yields that they pay out. And as we’ve seen so far this year, higher interest rates often follow from higher inflation, so bond investors have faced a one-two punch of declining bond prices and high inflation that eats away at the purchasing power of their income streams.
Other investment types, meanwhile, are relatively better situated to hold up in the face of inflation. Those investments cluster in three broad groups: those that offer a direct inflation adjustment as part of their returns (TIPS, I Bonds); those that have tended to generate higher returns in inflationary environments but don’t explicitly deliver a component of their return that is linked to inflation (commodities and commodities-related equities, REITs); and investments whose longer-run returns have tended to beat inflation over long periods of time (stocks).
Ideally, investors would maintain inflation protection on an ongoing, strategic basis, rather than attempting to add it after inflation has already reared its head and boosted the prices of inflation protection in the process. Dollar-cost averaging into a desired position size over a period of years helps alleviate the risk at buying in at a high point.
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