Inflation is tricky. There is no easy way to define it. On the surface, it seems simple – the price of things going up. But which things? How much weight should we assign each item in a basket of goods? We are also not entirely sure what causes it. Many prepared for a hyperinflationary environment in the wake of the Global Financial Crisis that never materialized. Everybody is well aware of the inflation that has existed throughout the past decade(s) in healthcare and education, but perhaps post-COVID inflation will look different. A rush to the suburbs and a shortage of housing supply has seen the price of lumber quadruple in less than a year. We have also seen the price at the pump awake from its slumber and essential agriculture commodities like corn and soybeans have appreciated meaningfully in the past few months.
In a portfolio, fixed income will bear the brunt of inflationary pressures the most. This makes sense. If you are expecting to receive a pre-defined stream of future payments in a world where future dollars are worth less, the price of that instrument will adjust downward to reflect this. An allocation to an inflation-protected bond issued by the government would help to offset this. Another option to protect your portfolio is commodities. They were the hedge of choice at the beginning of the last decade, but they were coming on the heels of explosive growth in the prior decade and needed a chance to breathe. As you can see in the accompanying chart, they have been lying in wait for the last five years and this could be their time to shine.
It should be mentioned that nothing is set in stone and decisions about your investments should be made in the context of your complete financial picture. Focusing on just one risk that may or may not materialize potentially leaves you exposed in other areas. A finely tuned financial planning process combined with investment implementation can only help to set you up for financial success.
David Rath, CFA is a Director of Portfolio Strategies at Continuum Wealth Advisors in Saratoga Springs. Continuum Wealth Advisors, LLC is a Registered Investment Advisor through the Securities and Exchange Commission.
Learn more about Continuum Wealth Advisors here.