Seema Shah, senior global investment strategist at Principal Global Investors, looks at how portfolios can be protected from inflation risks in the next couple of months….(read more)

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Portfolios Need to Include Some Kind of Inflation Protection This Year, Strategist Says

Inflation has been a major concern for investors in recent times, with rising commodity prices, supply chain disruptions, and massive government stimulus programs in response to the pandemic. As the global economy recovers, it is essential for investors to consider incorporating some form of inflation protection into their portfolios this year, according to strategists.

Inflation, defined as the sustained increase in the general price level of goods and services in an economy over time, erodes the purchasing power of money. When inflation rates exceed the returns on investments, it can significantly diminish the real value of one’s savings. This makes it crucial for investors to be proactive and seek opportunities that can protect their portfolios against inflationary pressures.

One popular strategy to safeguard against inflation is to include inflation-protected securities in a portfolio. These securities are specifically designed to adjust their value with inflation, providing investors with a reliable income stream that keeps pace with rising prices. Treasury Inflation-Protected Securities (TIPS) are one such example, issued by the U.S. Department of the Treasury and indexed to inflation. TIPS offer investors a fixed interest rate with the added benefit of adjusting the principal amount based on changes in the Consumer Price Index (CPI).

Another potential avenue for inflation protection is through commodities. Historically, commodities such as gold, silver, and oil have served as a hedge against inflation due to their tangible nature and limited supply. These assets tend to retain or increase their value as prices rise, making them an attractive option for investors seeking to diversify their portfolios and mitigate inflation risks.

Real estate is yet another avenue that can help in hedging against inflation. As rental prices tend to rise with inflation, real estate investments can provide a steady income stream that adjusts according to the prevailing market rates. Additionally, owning physical property can serve as a tangible asset that retains its value throughout inflationary periods.

It is worth noting that while inflation-protected securities, commodities, and real estate can act as potential safeguards against inflation, they also come with their own risks and drawbacks. Each investment avenue requires careful consideration, taking into account factors such as market conditions, risk tolerance, and long-term investment goals.

Diversification remains key for investors seeking to protect their portfolios against inflation. Combining various asset classes that can perform well in different economic conditions can enhance the overall resilience of a portfolio. Understanding individual risk appetites and consulting with financial advisors is critical to tailor an inflation protection strategy that aligns with investors’ needs and objectives.

In conclusion, given the current economic climate and concerns surrounding inflation, incorporating some form of inflation protection in portfolios this year is crucial. Whether through inflation-protected securities, commodities, real estate, or a combination of several strategies, investors must take proactive steps to mitigate the potential risks inflation poses to their savings. By diversifying their investments and seeking professional advice, investors can make informed decisions and strive for long-term financial security.