The very best funding choices when inflation rises

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Inflation rose faster in June than it has been in over a decade, and the news worries investors.

Because rising prices can reduce the profit of a portfolio. Quite simply, when the cost of living goes up, your returns won’t go that high.

This is a particularly tough challenge for retirees, who can rely on their investment returns for the most part of their bills while younger people still have a salary. Then there’s the fact that inflation can cause the Federal Reserve to raise interest rates, which tends to be bad for stocks.

“In general, inflation is usually negative for stocks,” said Amy Arnott, portfolio strategist at Morningstar.

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She referred to history: Between 1973 and 1981, inflation rose more than 9% a year. During the same period, the shares lost about 4% annually.

But don’t panic – that has never helped an investor.

For starters, we still don’t know if rising prices will become the new normal or if it’s just a temporary result of a nation emerging from a pandemic and a year of lockdowns and restrictions.

Either way, history shows that stocks beat inflation over the long term.

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According to calculations by Steve Hanke, professor of applied economics at Johns Hopkins University in Baltimore, the average annual return on stocks between 1900 and 2017 was around 11%.

After deducting inflation costs, this average annual return remains at an impressive 8%.

Still, there are a few steps investors can take to protect their money from inflation – and even save the environment, say financial advisors.

This is how you benefit from rising prices

Alex Doll, a certified financial planner and president of Anfield Wealth Management in Cleveland, has recently scaled back client exposure to growth stocks. And he’s increased their allocation to value stocks or companies that trade at below-average prices on the S&P 500.

“Value stocks can do a little better in times of inflation,” said Doll.

This is because these companies are often in industries like finance and consumer staples, which are less affected by inflation than other industries. “

As a rule, these companies are already well established, so there is no need to worry about a loss in value of the expected growth.

Another great choice for investors worried about inflation are inflation-linked treasury securities, or TIPS, said CFP Nicholas Scheibner, wealth management advisor at Baron Financial Group in Fair Lawn, New Jersey.

These securities carry similar risk to other fixed income investments, he said, but they add an adjusted principal as inflation rises.

Other inflation hedges include investing in real estate, gold, and even cryptocurrencies, advisors say.

“Real estate is doing well because landlords and property owners are seeing the value of their properties rise,” said Doll. “Landlords can also pass rent increases through relatively easily.”

The case for investing in cryptocurrencies or gold amid inflation is that these assets will not be damaged by the depreciation of cash.

However, both are very volatile and shouldn’t make up more than 5% of your portfolio, experts warn.

Investments to Avoid Amid Inflation

With a rate hike by the Fed on the horizon, experts recommend not tying up too much money in long-term bonds or certificates of deposit. This could result in missing out on higher rates later.

“I currently advise our clients to focus on short to medium term bonds and avoid investments that have ‘long term’ in their name,” said Doug Bellfy, CFP at Synergy Financial Planning in South Glastonbury, Connecticut.

Another area you might want to stay away from is in growth stocks or companies with above-average expected earnings, Doll said.

“Growth stocks tend to perform worse because they expect to make the majority of their cash flow in the future,” said Doll. “And when inflation rises, those future cash flows are worth less.”

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