The value of a dollar today won’t match its value in five, 10, or 20 years. This is due to inflation, a natural occurrence in which a currency’s purchasing power declines over time.
Inflation is an ongoing problem, and it can hinder the performance of your investment portfolio. There is no telling how it will affect a currency’s value, but you can learn how to protect against it. This guide will explain inflation and its causes, and it will help you know how to react as an investor.
Inflation and Its Effect on Your Investment Portfolio
People use inflation to measure the impact of price changes across a set of products and services for a given time frame. It’s predicated on the supply of money available in an economy and can be categorized into three groups:
This form of inflation occurs when an increase in the supply of money in an economy and the demand for products and services exceeds its production capacity. This causes the demand and prices for these products and services to rise simultaneously, creating a supply-demand gap. The result: Prices are further increased, which can lead to devaluation of the currency.
This is related to additional supplies of money and credit provided to a commodity or other asset markets. These instances can lead to higher costs for the finished products or services and increased prices for consumers. This means that, even though money is being used to stimulate the growth of asset markets, consumers are paying more, which means their money becomes less valuable.
This centers around the idea that businesses project inflation to increase continuously. Companies set prices for products and services and expect them to climb, and their workers expect wage increases in affordance with inflation. This can lead businesses to raise the prices of their offerings to offset increasing wage costs, as well as lead to a seemingly endless “wage-price spiral.”
You may find yourself dealing with any of the above types of inflation, regardless of your investment portfolio. You cannot stop inflation, but diversifying your portfolio offers a great option to combat it.
Why You Need to Diversify Your Investment Portfolio
Putting all your eggs in one basket may seem like an attractive investment option when you think you’ve found a good angle. Doing so creates significant risk, though: If you make a poor investment, you can lose everything in one fell swoop.
Diversification guards against inflation that can damage your investment portfolio. It ensures you can minimize the risk of substantial financial losses, since your portfolio’s performance is not tied exclusively to one currency or asset.
Let’s not forget about the growth opportunities that can become available in a diverse portfolio, either. Holding a single investment can help you capitalize on growth in one area, but maintaining a diverse portfolio can deliver returns across multiple sectors.
How to Protect Against Inflation and Diversify Your Investment Portfolio
If you want to discover how to protect against inflation and diversify your investment portfolio, help is available. You can partner with an investment management advisor who has your best interests at heart. This advisor can learn about your investment management goals and help you uncover ways to optimize your portfolio’s performance.
An advisor can develop a personalized investment management strategy. They can also provide insights into any of the following options that can help you simultaneously protect your investments against inflation and diversify your portfolio.
Investors sometimes refer to bonds as “fixed income,” since these investments provide a predetermined payout over a set period. You will have less exposure to inflation by choosing short-term bonds over long-term ones. Or you can select high-yield or emerging market bonds that offer protection against future cost-of-living increases.
You can invest in stocks that have dividends, so you’re assured of making additional money based on what a company earns. This means as a company increases its revenues, your dividend can rise accordingly, and what you earn can help you hedge against inflation.
3. Real Estate
The U.S. housing market experienced an average rate of inflation of 4.14% annually from 1967 to 2021; comparatively, the overall inflation rate in the U.S. was 3.91% during that time. Average U.S. home prices rose 797% from 1967 to 2021. This reflects how owning a home or rental property can provide a viable investment and an excellent safeguard against inflation.
Keep in mind that economic markets fluctuate constantly, so maintaining a diverse investment portfolio requires hard work and patience. Those who conduct regular evaluations of their investments can ensure their portfolio is balanced, regardless of how markets perform.
3 Steps for Rebalancing Your Investment Portfolio When Economic Markets Fluctuate
It can be worrisome to hold investments in fluctuating economic markets. Try not to stress if a market in which you have invested suffers a decline. You can instead use the following steps to rebalance your portfolio.
1. Evaluate Your Investments
Look at your investments and how you originally wanted your portfolio to be set up. It pays to consult with an investment management advisor, as this professional can help you conduct a thorough review. Your advisor can also help you fine-tune your investment strategy.
2. Assess the Performance of Your Investments
Find out how your investments have performed to date and consider dropping any that have missed the mark thus far.
3. Align Your Investments Based on Your Requirements
Finalize your plan to rebalance your portfolio, then buy or sell assets to complete the process.
Rebalancing your portfolio can be quick and straightforward, especially if you work with an investment management advisor. Your advisor can provide tips and guidance to avoid common portfolio mistakes in addition to helping you protect your investments against inflation.
How to Avoid Common Mistakes With Portfolios
Even experienced investors are susceptible to mistakes along the way. Common mistakes by people trying to diversify their portfolios and hedge against inflation include:
- Frequent investment turnover
- Letting fear or greed drive their investment decisions
- Lack of patience
- Trying to time the market
Working with an investment management advisor ensures your portfolio is in good hands. This advisor can help you set up a diverse portfolio and keep you updated regarding its performance. Professional advice can provide some of the best inflation protection there is.
Contact an Expert With Questions About How to Protect Against Inflation
Inflation shouldn’t stop you from getting the most value out of your investments. Expert guidance is available to help you build a portfolio designed to mitigate the impact of inflation.
Bogart Wealth has independent investment management advisors who can show you how to protect against inflation. Our advisors can craft a custom strategy that aligns with your investing goals. Contact us today to learn more about our investment management services.