Can investing stave off the effects of inflation?
In Canada, you may have heard experts on the news talking about inflation.
Following the pandemic, experts predict that Canada will face a period of increased inflation over the next several years. Inflation is the name for the phenomenon where the price of consumer goods and services increases, meaning our dollar doesn’t go as far.
When inflation occurs, our cash becomes worth less, in that it has less buying power. In this way, inflation can eat into our investments if they’re held in cash. So what could the coming inflation mean for your financial goals?
How Can Inflation Hurt Investments?
If you’re already investing, you may hear more about the notion of “beating” inflation with strategic investments.
This notion comes from the idea that certain financial tools may fare better than others during periods of inflation.
On the flip side, holding a large percentage of your investments in cash means you could see your investments suffer as that cash becomes worth less over time with inflation.
Inflation is a normal part of market economies, so cash holdings will likely always depreciate in value over time unless you can find a way to gain interest on that cash at an interest rate that matches or outpaces typical inflation rates.
Investments For Inflation
There are strategies that some experts think may perform better during periods of inflation than other typical investment strategies, especially those that include cash holdings.
But whether you opt into changing your investment strategy is personal. You know what is best for your finances, and if you’re worried, always speak with a trustworthy financial advisor to get their take. We’re not going to give you financial advice or recommend specific strategies, so what we list here is only information to assist in your own research.
Here are a few financial instruments that experts believe could help stave off the effects of inflation on your investments.
There’s no guaranteed way to inflation-proof your investments, but one often discussed strategy involves a 60/40 split stock/bond portfolio. This is considered a conservative but potentially safer investment strategy during periods of inflation.
Proponents of this strategy say these portfolios can be a straightforward investment strategy comprising stocks (fractions of ownership in a company that may pay dividends) and bonds (a debt owed by the bond issuer to the bond holders). This portfolio makeup could perform well during periods of inflation.
But other folks argue the opposite. Simon Moore argues that stock/bond splits may “get hit from both sides, as prices rise both stocks and bonds can fall in price.”
Further, in periods outside of inflation, these portfolios typically tend to underperform, and some think a 60/40 split is said to be rather conservative, weighting too heavily toward bonds.
As our friends at Investopedia say, “it's important to keep in mind that a 60/40 portfolio will help you hedge against inflation (and keep you safer), but you'll likely be missing out on returns compared to a portfolio with a higher percentage of stocks.”
As such, a portfolio like this one may serve your investments well during inflationary periods, but you should consult with your financial advisor to find a stock/bond split that may work best for you.
There are several ways that real estate related investments can avoid and even benefit from the effects of inflation. During inflationary periods, real estate prices may generally increase—both in the cost of buying a home and the cost of rent.
So there are a few ways you can put your money to work in real estate.
For example, you may choose to invest in a Real Estate Investment Trust (REIT). A REIT is a company that owns and operates income producing properties and pays dividends to its investors. These companies tend to do well during inflation because rent typically goes up.
Otherwise, if you’re considering buying a home, soon may be a good time to do it: because historically as inflation carries on, home prices tend to go up. By purchasing a home—especially if you simply intend to live in it—you’re investing in a real asset that typically doesn’t lose value over time.
If you don’t want to live in the home you buy, you could consider renting it, again capitalizing on any rental income increase.
There are moral implications for investing in the rental housing market. As Canada faces a worsening housing crisis, many Canadians are struggling to pay rent. If you look to benefit from this crisis, be sure you understand how it may impact those around you.
Tech Stocks in the S&P 500
Not all stocks are likely to do well during inflation.
Stocks in companies which are at the mercy of consumer prices can suffer as their own buying power diminishes.
But tech companies can perform well during periods of inflation because they usually need less capital to operate. Companies which provide services that need less capital investment to function can begin to turn bigger profits. The S&P 500 has a lot of tech companies trading on its exchange—so you could perhaps consider investing there.
There is always risk to investing in any industry’s stocks (or anywhere!) so if this option feels right to you, be sure to consult a trusted financial advisor.
Staying the Course
Depending on the size of your investments and the length of your intended investment period, you might also be able to simply stay the course.
If you’re close to retirement, it’s worth discussing your options with a financial advisor. Protecting the value of your investments is important, so now is probably not the time to take risks with stock portfolios.
If you’re only beginning your life as an investor, you might consider not changing anything about your investment plan now. Inflation can occur with regularity in the market, so you may opt to consider any setback as something you’ll recover from.
There’s no one size fits all solution to protecting your investments from inflation. In these situations, certified financial advisors can be great resources. Just remember: act with caution, do your research, and choose wisely.
You got this, friends.
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This blog is provided for informational purposes only, isn’t intended as investment advice, and isn’t meant to suggest a particular investment or financial strategy is suitable for any particular investor. Nothing herein should be considered an offer, solicitation of an offer, or advice to buy or sell securities. It’s important to remember that past performance is no guarantee of future results. If you’re unsure about an investment, you may wish to obtain investment advice from a qualified professional.