The goal of any investor is to grow wealth over time, but as the global stock market continues to take a beating, many Americans are left wondering where to put their money. The good news is there is always an opportunity to make money—even during times of rising inflation.
Inflation is nothing new and rising prices have become an unavoidable fact of life for most. You hear about inflation in the news, you see it at the grocery store—and hopefully you’ve thought about how inflation is impacting your investments.
The promising side is that you can help protect yourself with the right investment strategy. But how do you know what you should be investing in? Here, we’ve rounded up some ways to invest during times of volatility and inflation.
Diversify, Diversify, Diversify
Don’t put all your eggs into one basket. Investing in a diversified portfolio of stocks is one of the best ways to beat inflation and diversify your portfolio all in one place.
According to research from July 2012 to July 2022, the S&P 500 returned an average annualized 11%. After accounting for inflation, that comes out to 8.3% annual returns. So even with today’s substantial price gains, you’d still have outdone rising prices by choosing a diversified portfolio over individual stocks. On the flip side, there’s no real need to resort to picking individual stocks — which can be research intensive and high-risk — in order to benefit from this kind of historic growth. Get started by choosing an S&P 500 index fund or S&P 500 ETF (exchange-traded fund), which track the index’s return and keep costs low.
For most investors, a mutual fund is an even better option because it’s managed and guided by financial advisors who know how to create an inflation hedge through other asset classes, such as cash and bond yields.
Treasury Inflation-Protected Securities
Treasury Inflation-Protected Securities (TIPS) are a type of Treasury security issued by the U.S. government designed to protect your investment from rising prices. If you want to protect your portfolio against inflation, TIPS may be a good option.
TIPS are a popular asset for both protecting portfolios from inflation as well as profiting from it because they pay interest every six months based on a fixed rate determined at the bond’s auction. However, the interest payment amounts can vary since the rate is applied to the adjusted principal or value of the bond.
If the principal amount is adjusted higher over time due to rising prices, the interest rate will be multiplied by the increased principal amount. As a result, investors receive higher interest or coupon payments as inflation rises. But if you invest in TIPS, you’ll also need to watch out for deflation. Though you’ll never receive less than the original par value of a TIPS when it matures, its value can still decrease while you’re getting interest payments
Recession Proof Stocks
When we feel the inflation pinch, discretionary purchases such as susbsriptions and dining out are the first to be cut. Which is why we see these stocks dip during hard times. However, we all need food, medication, hot water and electricity. Which is why these necessities are known as “recession Proof” – because no matter how hard done by we are, these stocks will weather the storm and may even increase in value.
what about Gold?
With the recent volatility in stock and bond markets, smart money is moving toward gold. Investing in gold is a popular way to protect your savings against inflation. Over the last 20 years, gold has averaged an annual gain of 9.48%, while inflation has averaged 2.4%. That means a 7.08% rate of return for investors who invest in gold.
When you consider purchasing actual gold, the additional costs come to mind. These could take the shape of making fees and gold storage costs. Due to the ability to acquire and sell gold at market rates without having additional fees added to the metal, gold ETFs are significantly more efficient in this sense.
You’ll also need to understand whether your fund of choice aims to track the price of gold or rather gold mining companies. Both can be decent ways to play the gold market, but their returns may vary considerably. In addition to gold’s intrinsic stability as an investment option, many investors also include it in their portfolio to diversify their holdings in a way that outperforms average inflation.
Final Thoughts
As inflation remains high, it is important to bear in mind that short-term volatility in the stock market is to be expected. Therefore, it is essential that you only invest capital which you do not need in the short-term. Some of the strategies outlined above will not be good for everyone, but chances are there’s at least one that is doable for you.
Overall, a detailed investment plan can help to make sure your portfolio keeps up with rising costs. At APO Financial, we will work with you on hand to ensure you’re making the right investments to diversify your portfolio. Our job is to help you mitigate risk through proper planning, education, and tactical asset management with the goal of protecting and growing your hard-earned nest egg.
Investors should make a plan for how and when to rebalance their account and set necessary reminders to do it! APO Financial is here to help, so do not hesitate to contact us with any retirement planning questions.
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