Fidelity: 7 Investments To Get To Inflation-Proof Your Portfolio
Written by
David Nadelle
Edited by
Jenna Klaverweiden
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According to U.S. Labor Department data published on June 11, the annual inflation rate (measured by the consumer price index) for the U.S. was 2.4% for the 12 months ending in May. This was up 0.1% from the 12 months ending in April.
Inflation remains much lower than it was at this time last year and has been hovering just above the Federal Reserve’s target of 2% for several months. “It was a very good report. Basically, it says inflation has finally gotten back to the Federal Reserve’s annual inflation target,” Mark Zandi, chief economist at Moody’s, told CNBC.
However, many economists are predicting that President Donald Trump’s tariff strategy may have a detrimental effect on inflation in the months ahead. “I think it’s the calm before the inflation storm,” Zandi told CNBC. “This [report] still reflects the disinflation that began a few years ago and continued on through the month of May.”
With consumer price and inflation worries constant and recession fears cooling but refusing to go away completely, it’s a shrewd move to place some defensive investments in your portfolio. Here are seven ways that Fidelity recommended defending against inflation through diversifying your portfolio.
Stocks
Stocks can be negatively affected in the short term by sudden inflation increases or economic downturns. However, long-term equity investments have typically produced returns that are significantly higher than inflation, according to Fidelity. If you’re invested for the long haul, don’t hurry to change your financial plan.
“In a growing economy, companies that issue stock can grow earnings in real terms during inflationary environments by raising prices in response to higher input costs,” said Anu Gaggar, Fidelity’s vice president of capital markets strategy.
International Stocks
Home country bias — the tendency to invest primarily in one’s own country’s companies — is a global phenomenon, but not all of the world’s economies trend the same. If near-term U.S. prospects worry you, investing in emerging foreign markets can help spread out a portfolio over-dependent on U.S. stocks.
“Many U.S. investors have this misguided notion that the S&P 500 Index is the be-all and end-all of the stock market,” said Jeffrey Kleintop, Schwab’s chief global investment strategist. “But if you’re not investing abroad, you’re missing out on more than half the global market.”
Fidelity cautioned, however, that international stocks can be more volatile.
Treasury Inflation-Protected Securities (TIPS)
According to Fidelity, investors concerned about inflation could look into investing in Treasury Inflation-Protected Securities (TIPS), which are government bonds whose face value and interest rate payments rise and fall with inflation.
According to TreasuryDirect, TIPS are available for five-, 10- and 30-year terms, and at the time of maturity, you’ll get back either the original principal or an increased price based on inflation. However, you won’t get a lower principal than what you paid.
Gold
Although Fidelity pointed out that gold shouldn’t occupy a significant part of your portfolio (because it doesn’t pay out income through interest or dividends), it has a strong historical record as a broad inflation hedge in times of economic turmoil.
However, although it’s been a hot commodity recently, gold seems to perform best when inflation is significantly higher than it is now. For unexpected changes in the inflation rate, or shocks, it might be wise to look at other commodities.
Commodities
Commodities besides gold (agriculture, energy, metals, etc.) have proved to be extremely resilient to inflation and have been an important hedge for stocks and bonds during periods of rising prices and wages.
According to Goldman Sachs Research, during inflation shocks, commodities returned real gains of 7 percentage points, compared with a decline of 3 and 4 percentage points for stocks and bonds, respectively.
Real Estate
Like gold, real estate has proved to be a sought-after investment with significant protective and potentially lucrative value, per Fidelity. Having a fixed-rate home mortgage is a good hedge against inflation, but investing in income-generating real estate might be the best protection against rising prices.
Investing in real income properties — through either directly purchasing single- or multi-family homes or passively investing in syndications sponsored by private equity firms — can increase your income as inflation and rents rise.
Floating-Rate Loans
Floating-rate loans can serve as a hedge against inflation because their interest rates vary along with current rates. Borrowers pay higher interest on loans as market rates rise, protecting their primary market value.
This provides an edge over standard fixed-rate bonds, which typically see price losses as interest rates rise. “Floating-rate debt has one of the best ‘hit rates,’ or historical odds, of outperforming inflation,” Gaggar said.
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