WHY & HOW INVESTORS SHOULD POSITION THEIR PORTFOLIO FOR INFLATION
Updated: Jul 14
Positioning your portfolio against inflation is necessary to protect against losses. It may sound counterintuitive, but investors can profit from inflation through the strategic maneuvering of their assets. Consumers prepare to stretch their stagnant paychecks even further during times of rising inflation. Smart investors, on the other hand, can continue their profits with the right moves.
What is rising inflation — and why should investors care?
A simple explanation of rising inflation is that it is a sustained increase in the price of goods and services. A more in-depth look at inflation reveals why – and how – it impacts Australians. Inflation is an economic indicator of performance. More than that, it is a key driver behind the Australian government’s economic policy.
Inflation usually is measured on a quarterly or annual basis. For instance, if the price of a litre of petrol increased from $1.42 to $1.89 over a three-month period, that is an indication of rising inflation. But while inflation is usually low, rising inflation is coming and must not be ignored by investors. Adjustments to the inflation rate in Australia are published quarterly by the Australian Bureau of Statistics (ABS). The ABS uses the Consumer Price Index (CPI) – a key indicator of inflation – to calculate the percentage of inflation each quarter.
The index measures household inflation rates and includes helpful statistics about price changes for household expenditures by category. The Reserve Bank of Australia’s (RBA) inflation target is between 2 and 3 per cent.
But why does it target inflation? Using a target inflation rate helps the RBA achieve its longstanding goals of full employment, price stability and prosperity for Australians. When inflation is too high, the real value of money is reduced. This can affect consumer spending. While it’s true that consumers view inflation negatively, wise investors look at it as an opportunity for growth. That is if they have the right kind of investments. Tying up too much of your money in long-term bonds or stocks is a bad investment decision during rising inflation.
What are inflation hedges?
Investing in assets that are expected to maintain or increase their value over time is considered hedge investing. Inflation hedges protect investors from the decreased purchasing power of currency that can occur during periods of rising inflation. An inflation hedge also can come in the form of higher positioning in assets, which prevents the kind of rapid decrease in value currency experiences during inflation.
For investors with superannuation funds, you can hedge them against inflation with the right strategies. Contact the knowledgeable financial advisors at ActOn Wealth to learn more about how we can inflation-proof your investment portfolio.
Why is gold an inflation hedge?
Gold is an excellent example of a hedge against inflation. Some investors consider it an alternative form of currency, due to its staying power during periods of rising inflation. This precious metal holds its value whilst native currencies decrease in value – the classic definition of an inflation hedge. Why is gold an inflation hedge? Unlike paper currency, gold is a true physical asset. That means it will never lose value or collapse the way currency can.
Of course, this doesn’t mean gold is a perfect inflation hedge. The banks combat rising inflation with increased interest rates. Additionally, gold does not pay yields. So when inflation rises, there are better assets in which to invest that can deliver higher yields.
Best investments for inflation protection
No one likes to lose money on their investments, so creating a diversified portfolio can provide inflation-hedging benefits. The best investments for inflation protection involve the following sectors:
Bonds — This might sound counterintuitive because inflation decimates fixed-income investments. Overcoming this obstacle is easy when purchasing the right kind of bond: inflation-linked bonds. They are tied to the Consumer Price Index. What does this mean for investors? Simply put, when inflation rises, the outstanding principal of these bonds rises with it.
Commodities — Buying, selling, or trading raw products is a popular inflation hedge. Examples of commodities include cobalt, copper, gold, lead, nickel, silver and zinc. You also can invest in agricultural and energy commodities for your portfolio. Typically, commodity prices increase when inflation rises, making them one of the few assets that benefit from periods of inflation. Every diversified investment portfolio should include commodities if inflation hedging is a priority.
Real estate — Rising inflation increases the resale value of property over time. During times of inflation, developers must face higher building costs. Consequently, rents must match those costs to help investors recover their initial financing for the project plus earn a tidy profit. This puts existing landlords at a competitive advantage. Real estate is all about capital management and pricing power, which is why it is an inflation hedge.
Stocks — Not all equities are created equally, so it pays to work with an experienced financial advisor if you plan to add stocks to your inflation-hedged investment portfolio. Avoiding high-dividend stocks during rising inflation is the key. Choose stocks in companies that can pass higher costs on to the customer, such as those in the consumer staples sector (beverages, food, non-durable household products, personal products).
Not sure which of these investments is right for you? ActOn Wealth’s financial advisors can help direct you toward an inflation-proof portfolio.
Rising inflation protection experts
ActOn Wealth are the rising inflation protection experts. We understand that different assets provide different outcomes during periods of inflation. Clients trust us to use our award-winning financial advice to create and manage their wealth. Our team provides guidance to investors on how to diversify their portfolios with the best investments for inflation protection. Phone us on 1300 022 866 or arrange an appointment online to schedule your no-obligation consultation.