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How to Hedge Against Inflation

Dr. Dan Pallesen, CFP®

Director of Financial Education

Last Updated
August 03, 2022
Grandma and girl holding grocery shopping bag

4 Tips to Help Protect Your Portfolio During Inflationary Periods

Individuals’ buying power can quickly be eroded during periods of high inflation. While you’re likely feeling the impact on your daily spending, the impact on your long-term investments will likely be more severe. The following tips can help position your portfolio to perform during periods of rising inflation.

Tip #1 – Remain diversified.

Regardless of the current market environment, it’s always wise to maintain a diversified portfolio. Investing in different types of assets spreads out your risk. Therefore, when one sector or investment type is performing poorly, another investment type that’s performing better can help smooth out volatility within your portfolio.

Diversification won’t prevent losses, but it can reduce the risk of being too heavily invested in the worst-performing part of the market. You can diversify by combining stocks with bonds, large company stocks with small company stocks, U.S. stocks with international stocks, and stocks from different sectors (such as technology, financial, energy, healthcare, etc.).

Tip #2 – Include an allocation to international assets.

American investors tend to favor U.S. stocks and bonds. This phenomenon is known as “home bias” and is often a result of emotions or feeling more comfortable with the familiar. Because they’re impacted by the same economic forces, U.S. assets tend to move in tandem with one another, which can be detrimental to your long-term investment returns.

During periods of inflation, adding foreign stocks and bonds can help hedge your portfolio against domestic economic challenges. A simple, low-cost way to access overseas exposure is through exchange-traded funds (ETFs) and mutual funds. Your wealth manager can help determine what type of international exposure makes sense for you and your particular financial situation.

Tip #3 – Consider other inflation-hedging assets.

In addition to including an allocation to international assets, you may wish to consider additional inflation-hedging assets, such as:

  • Commodity and/or commodity-related equities (energy, materials, etc.)
  • Real estate and/or real estate index funds
  • Value stocks
  • Treasury Inflation-Protected Securities (TIPS)
  • Short-duration bonds

Tip #4 – Plan in advance.

As with many other financial planning and investment issues, you’re more likely to successfully navigate periods of high inflation when you have a plan in place. Your wealth manager can help you establish a diversified investment mix that takes into account your particular risk tolerance, time horizon, goals, challenges and financial situation. Remaining committed to your plan can help keep you on track toward your goals through periods of high inflation.

At Creative Planning, we help clients make smart investment decisions throughout all phases of the market cycle. Please schedule a call if you’d like help hedging against inflation, or with any other financial matter. We look forward to working with you.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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