Practical Strategies Investors Can Use Now to Protect Portfolios Against Inflation Risks

Think of inflation like a slow leak in your bike tire—it makes your ride bumpier and your progress harder. For investors, inflation means your money doesn’t go as far as it used to. That’s why it’s important to know what’s happening with prices and how to protect your investments.

Why Inflation News Matters for Investors

When inflation goes up, the cost of things like food, gas, and rent also rises. This can make some investments lose value, while others might help you keep up with rising prices. Investors watch inflation closely because it can affect the whole stock market and even your retirement savings.

Good News and Warnings: What’s Happening Now

• Prices cooling down: The consumer price index (CPI) for June dropped by 0.4% from last month. Over the past year, prices are up 3.5%. That’s better than the 4.2% we saw in May, but it’s still higher than the 2% goal set by the Federal Reserve.
• Oil prices rising: Recent conflict in Iran pushed oil above $80 a barrel. Since the fighting started in February, U.S. oil prices are up nearly 23%. This could make inflation climb again, since oil affects the price of so many things.

According to U.S. government data, inflation averaged about 1.8% per year from 2010 to 2020—showing just how much today’s numbers stand out.

Bulls vs. Bears: How to Protect Your Money

• Bullish (positive) side:
  • Inflation protection tools: There are investments designed to help you keep up with inflation.
  • Stocks can keep pace: Historically, many companies raise their prices and dividends when inflation rises, helping investors stay ahead.
  • Real estate and commodities: These often do well when prices go up because rents and resource prices can adjust higher.
• Bearish (negative) side:
  • Unpredictable markets: If inflation stays high or gets worse, it could hurt stocks, bonds, and even real estate.
  • Interest rate worries: If the Federal Reserve raises rates to fight inflation, borrowing costs go up and some investments can lose value.
  • Oil and global risks: Geopolitical problems, like conflict in the Middle East, can quickly push up oil and other costs.

Ways to Hedge Against Inflation

Here are some investment ideas that may help your portfolio handle rising prices:

• Treasury Inflation-Protected Securities (TIPS): These government bonds adjust for inflation, so your money keeps its value. You can buy them directly or through funds. But remember, longer-term TIPS can swing in price if interest rates change.
• Dividend Stocks: Companies that pay steady and growing dividends can help outpace inflation. For example, S&P 500 dividends grew about 5.78% yearly from 1957–2019 (WisdomTree), beating inflation by more than 2%.
• Real Estate Investment Trusts (REITs): These own buildings and properties and pay out rent as dividends. REITs can raise rents over time, helping investors stay above inflation. Sectors like healthcare, data centers, and retail are worth a look.
• Commodities: Things like oil, metals, and crops often rise in price when inflation is high. Funds like the VanEck Commodity Strategy ETF and abrdn Bloomberg All Commodity Strategy ETF have done well lately, but their prices can swing a lot. Experts suggest only a small part of your portfolio here.

Investor Takeaway

• Don’t panic, but pay attention: Inflation is cooling, but risks remain. Watch for changes in oil prices and global events.
• Diversify for safety: Mix TIPS, dividend stocks, REITs, and a small amount of commodities to help protect your money.
• Check your bonds: If you own lots of regular bonds, remember that inflation can eat away at their value.
• Look for rising dividends: Companies with a history of growing payouts can help your income stay ahead of inflation.
• Stay informed: Keep up with economic news and review your investments regularly to make sure you’re protected against rising prices.

For the full original report, see CNBC