Since 2022, inflation has been one of the most common terms within financial circles. That’s because inflation influenced the performance of the stock markets and other asset classes and is expected to do so in the foreseeable future. The Federal Reserve has already shown that it is ready to keep raising interest rates to curb inflation going into the future. As an investor, this is the best time to find ways to protect your portfolio.
Several time-tested strategies can help protect a portfolio during periods characterized by high inflation rates. Applying them consistently across a portfolio can protect assets and grow their value over time. Here are some of the best ones.
Stay Away From Cash
There is a common phrase in investment cycles that cash is king. However, this does not apply in times of inflation. Since inflation eats into the buying power of fiat money, it means that as inflation rates rise, you would lose money every time rates go up.
You would quickly realize that what one dollar could have bought you before inflation hit is much lower. Besides cash for everyday needs, you must get into assets as much as possible to protect yourself and investable assets during inflation.
Invest In Government Bonds
In times of inflation, one of the moves that the Central Banks makes is to raise interest rates. This favors depositors and anyone who chooses to invest in bonds, such as the treasury bills issued by the government. Investing in treasury bonds in times of inflation benefits portfolio protection for two reasons.
Firstly, it is one of the safest investments out there. Secondly, rising interest rates make for a good passive income, which may be challenging to match from active investing in market uncertainty.
Commodities – Gold and Silver
In times of rising inflation, commodities, incredibly precious metals such as gold and silver, tend to increase in value. Gold outperformed the stock markets and most other assets between 2022 and quarter one of 2023.
The main reason why precious metals go up in value in times of rising inflation is due to their time-tested ability to preserve value. For instance, gold has been used as a store of value for more than 5000 years, and it’s yet to fail in this role.
The best thing about commodities such as gold and silver is that you don’t have to take physical ownership of the asset – which can be cumbersome. Instead, you can buy metal derivatives from various regulated stock brokers.
Buy Into Blue Chip Stocks
In times of rising inflation, stocks deflate as Central Banks raise interest rates. However, not all stocks are made equal. For the most part, as interest rates rise, growth stocks tend to take a hit as borrowing costs rise and consumer purchasing power drops. This is an issue that does not affect blue chip stocks as much.
These companies already have established brand names and have enough cash flows to sustain their operations without needing expensive loans. On the strength of these stocks, it makes sense to pivot towards them and away from high-risk stocks in times of market uncertainty.
In times of rising inflation, all markets get incredibly volatile. As such, it is best to develop mechanisms to protect your portfolio. Among the strategies you can use to increase your odds of navigating through times of high inflation are pivoting away from cash, investing in bonds, buying metals such as gold and silver, and re-balancing your stock portfolio with a focus on blue-chip stocks. Combining these approaches can protect and grow an investment portfolio even in an uncertain investment climate.