The annual inflation rate has hovered below 2.5% for the whole of 2010, but it rose above 5% in the summer of 2021 is likely to remain. Average costs increase dramatically for the first time in many people’s investing careers, and some investments will perform better than others. By following these three tips, your portfolio will be ready for continued inflation throughout the 2020s.
1. Choose stocks that benefit from inflation
Behind every action there is a company with a business model whose inflation has a different impact. Companies that will benefit from inflation can successfully pass their costs on to the consumer, such as Apple Where Amazon. People are still lining up to buy new iPhones and order things from Amazon Prime, and these mega-cap companies don’t feel the woes of inflation like any other.
For those who want access to equities but are concerned about high volatility, two sectors generally respond well to inflation. Basic materials companies provide the world with what they need, whether through manufacturing, mining, paper, chemicals, or metals. Consumer Staples are items that consumers will continue to buy during a recession, such as food, beverages, and household products.
A company that stands out in this space is Costco (NASDAQ: COT), which uses its Kirkland brand to make products at an affordable price, reducing costs for customers and retaining 90% of customers. With 100 million memberships and a growing online presence, it is well positioned for a high inflation environment. Costco can keep costs relatively low, and customers are likely to stay loyal with modest price increases.
In contrast, early stage businesses can have more difficult times. They often spend generously to acquire users and focus on long-term growth before profits. These businesses now have to pay higher prices for the same services and may not have sustainable income to grow as they would when inflation was below 2%.
The game-meet-game company Skillz (NYSE: SKLZ) is down 50% from its high at the start of the year. It is still in customer acquisition mode and the company reported a loss of $ 80 million last quarter, four times greater than a year earlier. While the business still has the potential for long term growth, it faces an uphill battle in the short term as it has to spend to acquire customers and faces higher prices with inflation.
2. Invest in other asset classes
Outside of traditional stocks, there are plenty of opportunities to hedge your portfolio. Traditionally, gold often works well with high inflation. Because the supply of gold slowly increases, the price rises when investors flock to the safe haven asset. Because most people don’t buy physical gold, the SPDR Gold Trust ETF (NYSE: GLD) is a popular and relatively inexpensive way to buy it.
Investors have also started to choose less traditional cryptocurrency hedging. Using the same logic around a finite supply, the demand for cryptos can increase as investors seek out investments that are uncorrelated with the rest of their portfolio. While the low risk of stablecoins might sound appealing, stablecoins will lose their purchasing power with inflation as the US dollar they are priced at becomes less valuable. Although volatile, a small allocation to Bitcoin (CRYPTO: BTC) Where Ethereum (CRYPTO: ETH) serves as an uncorrelated hedge for an equity portfolio, with greater potential for appreciation than gold.
3. Buy TIPS instead of fixed rate bonds
High inflation significantly weakens your purchasing power – how much your money can buy. While fixed rate bonds and CDs offer safety and little risk to your savings, they cannot cope with high inflationary environments. Investors who hold these bonds will lose their purchasing power, as the interest paid by these investments will likely stay well below inflation.
A good alternative is to buy TIPS instead of traditional bonds. As the name “Treasury Inflation Protected Securities” suggests, these bonds adjust their coupon payments to protect investors from inflationary risk. With the return of inflation, this is a better choice than fixed rate investments.
Higher inflation is coming, but you shouldn’t think of it as a cost. This is an opportunity to make sure that your portfolio contains uncorrelated investments that can perform well during inflation. Examine and diversify your portfolio, making sure that each position can withstand high inflation and is not correlated with your other investments. Whether you are buying public stocks or a non-traditional investment, you can find some great choices that are ready to profit over the next decade.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.