investments – Memphis Flyer

Inflation has been in the news a lot lately. The high inflation rates of the last couple years have significantly eroded Americans’ purchasing power on a variety of goods and services. While inflation puts a strain on short-term spending and saving, it can be especially detrimental to long-term investment accounts if not properly planned for. Fortunately, a well-built investment portfolio can help counteract the effects of inflation. The following tips can help preserve and grow the value of your investments in the face of inflation.

1. Diversify your investments.

One of the most effective ways to position your portfolio to weather inflation is by investing in a diversified mix of asset types, such as stocks, bonds, real estate, and commodities. Different asset classes tend to perform differently during various stages of the market cycle. By maintaining a diversified portfolio, you reduce the risk of all your investments being impacted in the same manner at the same time.

2. Incorporate stocks.

Historically, equity returns have outperformed inflation over the long term. Investing in a diversified mix of large- and small-cap stocks, both domestic and international, can help provide you with the long-term growth potential you need to offset rising inflation and protect your portfolio’s purchasing power. By owning stocks, you own the companies raising the prices causing inflation.

3. Consider inflation-protected securities.

Consider incorporating an allocation to inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS). TIPS are government bonds that change value based on the Consumer Price Index (CPI) that can provide a hedge against inflation. They offer fixed-interest payments that can help your investment keep pace with rising prices.

4. Include an allocation to real assets.

Tangible assets, such as real estate and commodities, have historically helped hedge portfolios against inflation. Real estate investments have the potential to appreciate in value and generate rental income, which can rise with inflation rates. Commodities tend to retain value during inflationary periods.

5. Rebalance regularly.

When planning for inflation, it’s important to regularly rebalance your investment portfolio. Rebalancing is the process of selling off outperforming assets in order to invest in lower-performing assets. While this practice may seem counterintuitive, it helps prevent your allocation from drifting too far from your target investment ranges. Adding to a lower-performing asset can be difficult, but it’s important to remember the reasons it’s in the portfolio in the first place. This practice helps offset inflation because it prevents one asset type from dominating your portfolio and throwing off your risk exposure.

6. Review your portfolio.

Periods of high inflation often coincide with challenging market conditions. Economic factors are constantly changing and evolving, so it’s important to regularly review your investment portfolio. This practice will ensure your portfolio continues to align with your goals and remains positioned to weather the prevailing economic landscape.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

Everyone has an opinion about cars. Luxury or economy, sedan or hatchback, van or pickup truck — preferences stay pretty consistent outside major life changes, like a new baby or a new RV to pull. To some extent, cars help define your personality in America, and car lovers tend to stay loyal to their favorite model or brand.

Investment portfolios help define your future, but hopefully they don’t define your personality. While you might get satisfaction from driving a fancy sports car, we believe “exciting” investments are likely best avoided. Your investments should actually be relatively boring and low cost while historically providing the performance you need in the long run.

There’s one quick and nearly certain way to lose money in cars or investment portfolios — making big changes too frequently for the wrong reasons. Hopping around from one investment to another can even be much more expensive than trading in for a new car every year, which we know is one of the pricier car decisions you can make.

Let’s say you own an Accord, and after five years and 100,000 worry-free miles you need a new water pump. You might feel a bit unlucky, but you would probably sigh and get it replaced. What you probably would not do is start second-guessing your decision to buy the car in the first place. You wouldn’t run across the street and trade in your Accord for a Camry because your friend told you at a cocktail party that Hondas are no good anymore and Toyotas are now the only reliable choice. You probably would have been fine in an Accord or a Camry, but switching back and forth between them because of short-term problems is far worse than picking and sticking with one or the other. Nobody manages their vehicles like that, so why do we think about investments in that way?

There are countless ways to invest in markets, and I believe only some of them are patently “wrong.” An appropriate portfolio for your circumstances will undoubtedly outperform and underperform various benchmarks at various times, and the periods of underperformance don’t mean you’ve bought the wrong portfolio. Financial news focuses on what is outperforming after the outperformance has already occurred, and using that backward-looking news as actionable trading advice can be devastating to your long-term returns.

Even if you can ignore the news, there are still opportunities to be distracted by recent performance. A sound investment portfolio for you might hold 10 different funds. Over any period, one of those funds will perform better than the others and one will perform worse. Performance comes in chunks, and although the instinct to sell the worst recent performer is strong, previous worst performers have a chance of improving and should therefore only be sold if something has materially changed in your initial investment thesis. One important thing to remember is why each element of your portfolio is there (regardless of recent performance) in order to avoid making big, emotional decisions due to the natural dispersion of investment returns.

Driving a new car off the lot usually cuts its value instantly and dramatically, but people don’t always think about the devastating consequences of chasing performance and making large and frequent changes in their investment portfolios. There’s little chance breaking financial news or current events mean you should make changes to an appropriate, low-cost, diversified portfolio. Consider showing the same brand loyalty to your portfolio that you show to your cars — investment loyalty can actually make a positive difference on the path toward a secure financial future.

Gene Gard, CFA, CFP, CFT-I, is a Wealth Manager with Creative Planning, formerly Telarray. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.