High inflation can wreak havoc not only on household budgets but on investment portfolios as well, hitting certain assets and generally making it more difficult for returns to outpace rising prices. That doesn’t mean investors can’t make moves to protect their wealth from high inflation.
In June, inflation hit its highest level in nearly 41 years, with the consumer price index rising 9.1% from a year earlier and 1.3% from May, the Bureau of Labor Statistics reported Wednesday.
Putting Inflation in Perspective
Despite the scary headline numbers, investors must consider how inflation affects them personally, said David Blanchett, managing director and head of retirement research at PGIM DC Solutions.
The government’s inflation numbers represent an average from a basket of consumer goods that affect people differently, Blanchett said. Fuel, used cars and airline tickets were up earlier this year, but health care costs didn’t rise much, he noted.
“No one is actually average, we all are experiencing inflation in different ways,” he said. “It’s really important for investors to understand how inflation is affecting them and then think about how to hedge it.”
If the things you buy haven’t seen dramatic rises in prices, Blanchett said, “then your need to hedge inflation is perhaps lower.”
Take housing, for example. Clients who own real estate have a place to live and an asset that shields them from rising rents, he noted. Inflation could affect renters a lot more, so it may make sense for them to own more assets that would do well with higher inflation, according to Blanchett.
While Series I savings bonds offer a good return, rents across the country have soared over the past year. Riskier assets like commodities might offer a less specific hedge to inflation and potentially better returns, Blanchett said.
“In theory you want to own assets that hedge your risks or liabilities more directly,” Blanchett said, adding that “it really depends the role your portfolio is playing in terms of covering your expenses versus just say the wages you earn from your job, which for lots of folks have also been rising a lot faster than inflation.”
Here are some other investments that can help clients manage inflation. Of course, no investment is ideal for every client. Blanchett and Christine Benz, Morningstar’s personal finance director, laid out some things to consider.