All of a sudden there’s a lot of talk about inflation coming back. It’s already a reality in emerging markets, where economies are stronger. Will it return, and what should you do?
While increased inflation seems likely given the Fed’s money-printing, no one knows how bad it will get. Betting on, or against, high inflation is just that – a bet. Instead, you should ask yourself: How much risk do you face? If your risk is significant, you need real protection. If you face more modest risk, you don’t need as much protection. So how to decide?
If you are working, you probably face less inflation risk. Your salary should generally increase with prices. You probably also have a higher percentage of your investments in stocks, which will usually go up with inflation. If you own a home, it has historically provided additional inflation protection (much less so of late). However, if you work for or own a business which faces inflation risk (for example, where costs may go up without an ability to raise prices), you may need protection. You could consider:
- Buying a mutual fund or ETF which holds TIPS (Treasury bonds whose interest payments rise with inflation);
- Adjusting your bond portfolio to have shorter maturities, which should suffer less with inflation than long-dated bonds, or adding some floating-rate bonds;
- Increasing your allocation to equities, esp. companies which appear to have pricing power;
- Buying commodities (agriculture, metals, oil, etc.), probably most easily done with ETFs; or
- Buying real estate, potentially through REITs.
If inflation doesn’t hit hard, those investments may under-perform, but your business will do better than it would otherwise … a classic hedge.
If you are retired or live on a fixed income (e.g. alimony), you are at more risk, because you won’t benefit from inflation-driven salary increases. Renters or homeowners with a floating-rate mortgage also have greater risk. For retirees, Social Security is indexed, but probably only covers a portion of your monthly expenses. Your pension, if you have one, is probably fixed. You need to be more proactive, using one or several of the steps outlined above.
Think of inflation the way you would any other risk. Only buy the insurance you need.