Inflation causes the prices of goods and services to rise over time. In a high inflationary environment, investors take steps to help their portfolios stay intact and ease their concerns over the impact of inflation.
These moves or hedges, so to speak, can be either strategic or tactical in nature. Here are four things you can do to fight off inflation and gain a peace of mind when investing in the markets in such circumstances.
Stick with Equities
Sticking with equities is perhaps the simplest thing you can do to protect your capital from the impact of inflation. For example, if a company faces growing costs, it can just offset the surge by increasing prices. That move then drives earnings and revenue up, which benefits both the business and investors.
That is why sticking with equities is ideal, as it is an excellent hedge against inflation and can align with an asset allocation strategy. Moreover, staying in the equity market provides you the opportunity to generate more returns and eventually improve your purchasing power.
If you’re the type of investor whose fear of inflation is worse than others, you may want to consider putting a few percentage points more of your portfolio to equities to ease your worries. You can remove the additional allocation once prices are stable.
Add Floating-Rate Bond Funds
Floating-rate bond funds may also provide the inflation hedge you need. These instruments can tactically tilt a portfolio and be helpful during times of high inflation because the interest on floating-rate bonds climb when inflation drives prices upwards.
Floating-rate bonds are often variable interest rate loans that banks make to firms. As regards credit quality, the loans are deemed senior debt. That means when the business goes insolvent, it is above other holdings, like high yield, on the repayment calendar.
Still, these bonds could be worth adding to your portfolio during periods of high inflation, as they can provide some support to counter the negative effects that inflation may have on your other bond investments. Typically, investors would tilt in the range of 1% to 3% with floating-rate bonds.
Opt for Commodities
Another tilt that you can make is with commodities. The prices of commodities usually trade in the green when inflation is high. Therefore, sticking with them would give you the chance to take advantage of the demand for the said assets.
It’s actually all about diversity when it comes to investing in commodities. A diversified commodities fund will help reduce some of the risks of such investment, and similar to floating-rate bond funds, a tilt is more than enough to fight off inflation.
Keep Holding Investments
Staying invested is probably the best move you can make to survive fluctuations in the market. While it’s not an exciting activity, it is usually the right thing to do.
Additionally, it would help to keep your focus on the components of portfolio construction and have an asset allocation strategy since it is designed to weather all market cycles after all.
