How to invest in times of inflation

People count money at the Macy’s Herald Square store during the early opening of Black Friday sales in the Manhattan borough of New York, November 26, 2015. REUTERS/Andrew Kelly

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NEW YORK, Feb 2 (Reuters) – Low inflation has spoiled U.S. investors for so long that last year’s surge came as a shock.

As those who lived through the late 1970s and early 1980s can attest, inflation can be a “wallet killer” because it erodes purchasing power.

Inflation rose to 7% in December from a year earlier, the highest level in decades.

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Even at 3% annual inflation, 20 years from now you’d need $181 to match what $100 buys today, according to fintech site SmartAsset’s calculator.

How does this change the money or asset mix you need for retirement?

“Many investors have never experienced inflation like we have seen in recent months, so now might be a good time to review your portfolio and confirm if you still feel confident,” Naveen Malwal said. , institutional portfolio manager at the Boston-based financial giant. Loyalty investments.

After all, certain asset classes tend to perform better during periods of high inflation. Among the top 15 asset classes in times of inflation since 2000, the best performers included oil (returning 41%), followed by emerging market equities (18%), gold (16%) and cyclical stocks (16%), according to a Wells Fargo study.

On the other hand, there were a few categories of bonds. Emerging market fixed income securities returned -8%, while investment grade fixed income securities returned -5%.

Economists generally agree that inflation will decline from current levels of overheating. Over the next 10 years, they expect the consumer price index to average a modest 2.55% a year, according to the Federal Reserve Bank of Philadelphia’s survey of professional forecasters.

“Look at the things that are driving inflation: there’s too much money for too few goods,” said Scott Wren, senior global markets strategist for the Wells Fargo Investment Institute.

“There is money supply growth, there are transfer payments that have increased savings, there is supply chain disruption. By the end of the year, we should see some easing, and all of these things will contribute to the inflation story.”

Which areas of investment should benefit from higher prices, and which will not? Here’s what the experts say:

AVOID CASH

During periods of inflation, the value of your cash holdings will erode over time, perhaps significantly.

“Investors are sitting on a lot more money than they should,” Wren said.

With indices like the Nasdaq (.IXIC) touching corrective territory, now may be the time to start using that money and accumulating harder assets that should hold up during periods of high inflation.

ADVICE IS YOUR FRIENDS

Fixed income markets tend to be hit hard by inflation. A bond paying a floor yield for an extended period is a poor option when prices and interest rates rise.

One corner of the bond market has the answer: Treasury Inflation-Protected Securities (TIPS), whose principal increases with inflation and pays interest twice a year at a fixed rate.

“It’s a way to stay invested in the bond market, and they’re literally designed to give you inflation protection,” Malwal said.

WATCH STORY

The investment has no guarantees, but past performance during periods of inflation may provide some clues.

“In high inflation environments, things like commodities do well,” Wells Fargo’s Wren said. “The same is true for mid and small cap stocks. The energy sector is generally doing well, as well as equity REITs (real estate investment trusts). I also think financials, industrials and the materials will all benefit.”

DON’T OVERREACT

Just because inflation is uncomfortably high, don’t expect it to last forever. Minor tweaks to the wallet may be needed, but wholesale changes are likely a mistake.

Forecasters see inflation falling in 2022 as supply chain issues ease, labor markets normalize and COVID-related emergency cash injections recede.

“Most people agree that we are heading for the bottom. The question is how long and how long will it take to get there,” Fidelity’s Malwal said. “It could be closer to 3-4% by the end of the year.”

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Editing by Lauren Young and Richard Chang Follow us at @ReutersMoney or http://www.Reuters.com/finance/personal-finance.

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