Sky-high inflation rates are affecting the price of swaths of everyday goods and services across the United States, leading to record-high fuel prices and eye-popping grocery bills.
But rising prices for consumers can affect another aspect of people’s lives: their investment portfolios. It can be particularly concerning for older people who rely on their portfolios to cover their living costs once they’re in retirement.
Overall, inflation was the top concern for investors earlier this quarter, according to recent polling data from Charles Schwab. The financial firm found that among its retail clients, 18% said inflation was their “primary money and investing concern,” followed by geopolitical issues at 16% and the risk of a recession at 13%.
Those concerns have likely only grown more recently as U.S. markets entered bear territory in mid-June, with the benchmark index S&P 500 falling more than 20% from an all-time high at the beginning of the year.
As a result of months of volatility, some investors have already taken steps to minimize their risk, while experts are advising others to plan for the rest of the year. The strategic shifts come as the continuing Russian invasion of Ukraine, pandemic-related supply chain woes, and record-high inflation rates contribute to a turbulent market landscape that experts predict will last throughout the summer.
“We have been recommending strategic weights across asset classes and sectors this year, not because we don’t have any ideas but because diversification itself is an especially good idea right now in the current period of heightened volatility,” Jeffrey Kleintop, the chief global investment strategist at Charles Schwab, wrote in the firm’s midyear outlook. “The correlation across stock markets has fallen to among the lowest levels in 20 years and portfolios benefit from diversification as sectors and markets move more independently of each other.”
At Fidelity Investments, a leading brokerage, “diversified client accounts have been repositioned numerous times over the past year in an effort to reduce the level of risk and provide some protection from inflation,” the company said on its website.
“One of the key investment decisions we made earlier this year was to increase exposure to commodities within well-diversified client accounts,” Naveen Malwal, an institutional portfolio manager, is quoted as saying. “That’s because, historically, commodities have provided strong protection from inflation for investors.”
“We also have exposure to real estate stocks, [Treasury Inflation-Protected Securities], and high-yield bonds in client accounts,” he added. “Those investments have also generally performed well for investors when inflation has been higher than average.”
Christine Benz, the director of personal finance and retirement planning at investment research firm Morningstar, said that generally, “it’s a mistake to be overly reactive to adjust your portfolio to what’s going on with the market or in the macroeconomy.” Rather, she said, the key to weathering tumultuous times is to plan in advance.
“Looking for inflation protection now is akin to trying to buy flood insurance when your living room is already soaked; you’re probably going to pay more for it than would have been the case in a more benign inflationary environment,” she told the Washington Examiner by email. “That said, it’s hard to blame investors for feeling like inflation was a non-issue; for the decade leading up to mid-2021, inflation was incredibly tame.”
Benz said choosing the best strategy depends on how close someone is to retirement. “For younger investors with at least a few decades until retirement, their best and simplest portfolio inflation protection will be to hold an ample stake in stocks,” she said. “Stocks are by no means a direct hedge against inflation; for example, inflation is way up this year and stocks are down! But they have historically out-gained inflation by a comfortable margin.”
“For older adults, it’s all about balance,” she said. “Older adults, even those who are retired and actively drawing from their portfolios, need to hold a decent stake in stocks for that same reason; they need growth. They also need safer investments like bonds and cash that they can draw upon when their stocks are down (like right now).”
Similar to Malwal at Fidelity, Benz says older investors should think about Treasury Inflation-Protected Securities, or TIPS, as well as I-bonds, which offer protection from inflation, to “help safeguard the purchasing power from the safe portion of their portfolios.”
“My bias would be for retirees to hold these investments as a percentage of their portfolios on an ongoing basis rather than trying to add to them opportunistically,” she said.
As a result, investors are likely to try a few different things to minimize their losses, experts say.
