Inflation Panic, a Quick Navigation Guide!

As we know from previous posts, inflation measures the overall increase in prices of a standard basket of goods and services over time. In the US, the “Fed” has a 2% long-term inflation average target, but due to the illness-driven recession in 2020 and the resulting aggressive monetary policies from governments around the world, the inflation rate in US accelerated to 5.4% in September of 2021.

This was the highest inflation rate since 2008 and there are concerns of higher inflation rates going forward. Central banks can manage inflation risk by increasing interest rates but this would negatively impact longer duration fixed income assets. In other words, the traditional 60-40 portfolio would work less well given the higher default allocation in mid to longer term bonds.

Considering the potential inflationary pressure and its impact on one’s investment portfolio, here are some asset classes to consider in an inflationary environment.

1. Gold

Gold has historically been considered a good alternative currency that holds its value; although gold is not a true perfect hedge against inflation, the diversification benefit still warrants its place in one’s portfolio.

2. Real Estate

Real estate has been a good inflation hedge over time and with the ability to adjust rental rate to offset inflation, one’s future income is also protected.

3. Alternative Fixed Income Assets

In a inflationary environment interest rates will likely go up and thus reduce the value of bonds that pay a fixed interest rate. One can minimize this interest rate risk by shifting to shorter duration fixed income assets that mature sooner and can be reinvested at higher rates; however, with interest rates at all-time low one should also consider private fixed income assets like private debt and mortgages in order to enhance the overall yield.

At the end of the day, we don’t try to predict what inflation rate will be, but it is always prudent to review your asset location with a knowledgeable advisor to ensure it is well designed for any market environment.