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Protect Your Portfolio from Inflation

Many investors don’t recall periods of runaway inflation, such as from 1970 through 1980, when it averaged an annualized 7.8%, cresting at more than 13% in 1980.

These days, the prospects for inflation are less intimidating. Even so, investors should consider protecting their portfolios now, cautions Ryan Ermey, Kiplinger’s Personal Finance.

What’s the threat?

“Historically, inflation has reared its ugly head at surprising times. Inflation-hedging strategies should be a long-term component of your portfolio, not something you do only when you think inflation is going to rise,” says Kristina Hooper, Invesco’s chief global market strategist.

And after years of inflation hovering below its 2% target, the Federal Reserve would likely tolerate a sustained period above that benchmark, says Michael Crook, head of Americas investing strategy at investment firm UBS.

There are signs of accelerating inflation lurking in the distance. A potential catalyst is the unprecedented amount of stimulus money flowing into the U.S. economy in the wake of the COVID-19 shutdown. The goal is to maintain or even drive up demand, which could be inflationary if it rises faster than the supply of goods and services.

A potential rollback in business globalization, including a trade war with escalating tariffs between the United States and China, is a potential driver of inflation in the coming years, says Fidelity Strategic Real Return fund co-manager Ford O’Neil. So is a push for all-domestic supply chains.

“Globalization was a huge headwind for inflation over the past 20 years,” he says. Protect your portfolio with Treasury inflation-protected securities (TIPS). The principal value of these notes rises in step with the consumer price index, the government’s main measure of inflation. Because the market is currently pricing in very low inflation expectations, TIPS are cheap.

Stocks have historically outperformed inflation over long periods. Hooper recommends high-quality firms whose competitive advantages allow them to raise prices to keep up with inflation without losing customers. Don’t ignore international stocks, says Crook. Rising inflation in the United States typically results in a weaker dollar – a boon for U.S. investors in international firms, whose foreign-currency profits get converted into more greenbacks.

Real estate is a classic inflation hedge, as landlords typically hike rents to match an uptick in inflation. But the potential for a drop in demand for rental, office or living space amid the COVID-19-fueled downturn has hurt real estate investment trusts. Select data center and warehouse REITs should be okay, however.

Gold is often touted as an inflation play. It’s been on a tear as investors seek safe havens amid market volatility. But its record against inflation is only so-so, says Russ Koesterich, co-manager of BlackRock Global Allocation fund. In successive 12-month periods from December 1973 through May 2020, gold beat the CPI only 51% of the time. Still, he says, for long-term investors, a touch of gold – say, 3% to 5% of your portfolio – makes sense.

Editor’s Note: Ryan Ermey is an associate editor at Kiplinger’s Personal Finance magazine,

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