How Inflation Affects Your Investment Portfolio
Inflation is not a new term and it is definitely not new to financial professionals. But if you are just starting out on your own investing journey, you may be curious exactly how inflation will affect your investment portfolio. Committed investors will be sure to continually monitor the level of inflation in our economy and the impact on their current investments.
In short, inflation is when goods and services get more expensive and you can purchase less with the same amount of money. For example, do you remember when going to the movies only costed cents? Maybe your parents do. Now, going to the movies costs upwards of $15.00! That is quite the rise in cost for the same service.
Rising inflation does not need to mean doom for your stock returns though. There are both positive and negative results that can come from inflation, and most of that depends on how well the investor is able to prepare.
Some of the negative results that inflation could have on your stock portfolio, specifically when buying stocks during an inflationary period, is simply paying more for a stock than it is worth. Occasionally, a company will make up for inflation by simply raising their prices while other times, larger businesses will not do this. But they will raise the prices of their stocks, which means that you are getting the same stock, only more expensive, that you could have gotten pre-inflation for more value.
Often during an inflationary period, since a company off sees raised prices, it seems as though they have raised revenue, which in turn makes your portfolio seem as though it is taking in more earnings. This means that those earnings will look as though they “drop” when the inflation declines. With the right perspective, this will not cause alarm, but without preparing it could.
When should you be really worried about inflation in regards to your current portfolio? Fixed Income Securities. These types of investments, especially for retirees, will provide less and less of a buying power with rising inflation.
How can you protect your portfolio in the case of inflation? This is where the stock market itself can come in handy. You can leverage the stock market to hedge your portfolio and protect it from the negative consequences of inflation. It can help you to keep a certain level of earning in the face of rising rates.
It is essential that you and your financial advisor take a serious look at your portfolio. Being proactive can help you to protect it in the face of high inflation and rising interest rates.
This article was originally published on MichaelBabyakFinancialAdvisor.com