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Invest to Beat Inflation

By Michael Jamison, Managing Partner & Portfolio Manager

Goldilocks and the 2% Target Rate

You probably wouldn’t eat a bowl of oatmeal that’s piping hot or ice cold. Similarly, for consumers to be eating good, the inflation rate needs to be “just right.”

Rising prices indicate the economy is growing at a healthy pace, which is why the Federal Reserve sets a 2% inflation target rate. And, until 2020, that’s exactly what the US saw: a “Goldilocks period” of inflation.

Then, during the pandemic, the inflation rate dropped below 2%, primarily due to lockdowns and other government restrictions on consumer behavior. Just two years later, it had soared above 9%, thanks to stimulus checks, a pressured supply chain, and the Russia-Ukraine war.

In response, the central bank initiated an aggressive campaign to cool it down. But decades-high interest rates have created a new set of challenges to navigate for consumers and investors alike. Fortunately, there are plenty of ways to protect your money from inflation.

Inflated Prices, Deflated Portfolio

First, it’s important to understand exactly how inflation affects your money. High inflation diminishes the purchasing power of investors as much as consumers. In other words, it raises the bar for how much investment portfolios need to earn to maintain their worth.

For example, if the inflation rate is 6%, you must earn more than that to grow your nest egg. Some investments accomplish this better than others. This is why it’s key to include investments that perform well in inflationary environments.

Inflation Hedges

While there are no guarantees, some asset classes are considered inflation hedges, meaning they tend to perform well in an inflationary environment. Here are some of the best investments to beat inflation.

  • Stock Sectors That Have Pricing Power

U.S. equities have historically outpaced inflation. However, equity categories that have “pricing power” perform particularly well during inflationary periods. Look at high-quality leaders within consumer staples, energy, healthcare and technology to bolster your portfolio.

  • Treasury Inflation Protected Securities (TIPs)

Fixed Income has only modestly outpaced inflation over time, and longer-term bonds tend to suffer during periods of rising rates. TIPs, however, are particularly resilient to inflation and are considered a safe haven for investors. While they may not earn you a lot of money, you will not lose your principal investment and – at a minimum – they will grow at the pace of inflation.

  • Select Real Estate Investments

Certain parts of the real estate market have proven resilient in past inflationary periods. In addition to private ownership, look to real estate options where demand remains steady across most economic environments such as self-storage and rental properties.

During inflationary periods, it’s important to keep a long-term perspective and frame your decisions around your risk tolerance and goals, such as retirement age. A holistic approach to pairing different asset classes can help protect you from taking on too much risk — or too little.

The wealth management team at Griffin Asset Management can partner with you to design the “just right” investment mix for you. Get in touch with us today.