Dan Ivascyn, Group CIO, discusses our outlook for inflation and why it still makes sense to protect portfolios from its impact.

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HOW TO: Hedge Against Inflation

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Inflation is a critical factor that can have a significant impact on an individual’s purchasing power and financial well-being. Inflation refers to the rise in the prices of goods and services over time, which leads to a decrease in the value of money. While some level of inflation is considered normal in a growing economy, excessive inflation can erode savings and reduce the standard of living for individuals.

Guarding against inflationary risks is essential to protect one’s finances and investments. There are several strategies that individuals can employ to hedge against the effects of inflation:

1. Invest in Real Assets: Investing in real assets such as real estate, commodities, and precious metals can provide a hedge against inflation. These assets tend to retain value or even appreciate in value during times of inflation.

2. Diversify your Portfolio: Diversifying your investment portfolio across various asset classes can help spread risk and mitigate the impact of inflation on your overall wealth. Stocks, bonds, and alternative investments can offer diversification benefits and potentially outperform inflation over the long term.

3. Consider Treasury Inflation-Protected Securities (TIPS): TIPS are government-backed bonds that are indexed to inflation. They offer investors protection against inflation by adjusting the bond’s principal value based on changes in the Consumer Price Index (CPI). TIPS provide a reliable way to preserve purchasing power in an inflationary environment.

4. Invest in Dividend-Paying Stocks: Companies that pay consistent dividends can provide a steady income stream that can help offset the impact of inflation on your portfolio. Dividend-paying stocks tend to perform well during inflationary periods, as companies can increase dividends to keep up with rising prices.

5. Monitor Inflation Expectations: Keeping a close eye on inflation expectations can help investors make informed decisions about their investment strategy. Economic indicators such as the CPI, Producer Price Index (PPI), and inflation forecasts can provide valuable insights into the direction of inflation and its potential impact on the economy.

In conclusion, guarding against inflationary risks is crucial for preserving the value of your savings and investments. By diversifying your portfolio, investing in real assets, considering TIPS, and monitoring inflation expectations, you can protect your finances from the erosive effects of inflation. Being proactive and staying informed about economic trends can help you navigate inflationary risks and secure your financial future.