There is no single answer that will work for every investor or always be successful in thwarting inflation.
Investors who rely on cash from their portfolio for living expenses (retirees, for example) can be in a tough position.
Bonds, which provide current income, are often a large part of a retiree’s portfolio, but inflation diminishes the purchasing power of fixed income securities.
The cureThe cure for inflation is often higher interest rates. Higher interest rates reduce the value of existing bonds.
Some advisors encourage investors to move more money into stocks when inflation threatens. Stocks – the right stocks, that is – have a good record buffering inflation because companies can raise prices to offset the impact.
However, in the long run, inflation is not good for stocks either. It distorts their value and may grow faster than companies can raise prices.
If you are going to stick with stocks or move more money into stocks, what type of stock should you consider?
A StrategyOne strategy investors may want to consider is looking for companies that provide products and services to industry sectors that continue to grow during periods of inflation.
Energy production and agricultural concerns may do well during periods of inflation, but many of these stocks are selling at premiums or experience volatility associated with commodities.
Companies such as mining equipment manufacturers, energy-related service companies and agricultural products, such as fertilizer manufacturers, may provide some protection against inflation.
The market for necessary goods and services will not be hurt as badly as others might be during periods of inflation (people still need toilet paper regardless of inflation).
This is not a magic answer and you’ll want to keep some money in bonds, but it is a strategy that will help ease you past periods of inflation.