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8 ways to protect yourself from inflation

The first half of the year is behind us, with a strong market performance at all levels. But what about the rest of the year? With inflation on the minds of many investors, how can you protect yourself against these risks and what strategies could help position portfolios better?

Inflation is apparently everywhere, with oil, timber, steel and real estate prices all rising. Some of that inflation could be with us for a while. Of particular concern is the rent increase – up more than 8% nationwide in June to a record high of $ 1,575 per month, according to Realtor.com. In addition, higher wages, while beneficial to individuals, may result in higher costs passed on to consumers.

What can you do to protect yourself from inflation and how can you make sure your portfolio keeps up with rising prices?

Inflationary environments often see asset prices rise, but they can be difficult for the value of bonds. As interest rates rise, the value of your bond portfolio could decline, potentially eliminating any benefit you receive from a constant return. In a period of low interest rate hikes, a traditional bond allocation can mean that some deadweight is preventing your portfolio from real upside potential. A portfolio that is too conservative will find it difficult to keep up with inflation.

Conventional financial planning suggests an increasing allocation to bonds as we age and approach retirement. For example, if you’re 60, you might need a 35% bond allowance. With interest rates so low and inflation increasingly threatening, you may want to consider reducing this bond allocation to optimize performance.

Consider increasing your allocation percentages in areas of the market that are doing well in inflationary environments.

Credit Suisse researched the markets where inflation is expected to rise and which sections of those markets performed best during this time. They found that on average, if the S&P 500 were to rise 0.45%, the energy sector would rise 0.86%. Two other areas with the potential to outperform are Financials, at 0.68%, and Materials, at 0.62%.

Increasing your exposure to funds, ETFs or individual stocks in these sectors could help your portfolio keep pace in an inflationary environment.

Increasing your exposure to equities can make sense, but it needs to be paired with a set of risk management rules. If you’re using an advisor, ask them about their volatility management strategy. If you are investing in a fund or ETF, take a look at how this strategy has stood up to past volatile markets and understand what goes into their risk management methodology.

If you buy an individual stock or an ETF yourself, set your own price targets. Perhaps set trailing stop losses to lock in your earnings and limit your exposure to the downside. A trailing stop order allows you to set a price to exit a stock that accumulates as the stock’s value increases. For example, a trailing stop loss of 15% on a $ 100 stock would initiate a sell of the position at $ 85, but if the value of that stock increases to $ 115, the trailing stop order will increase the exit sell price. at $ 97.75. You get the exposure to the stocks you want, but you limit your downside risk if the market moves the other way.

The key to any investment strategy is to not trust emotions and to have a cool head about your strategy. Take advantage of market opportunities, but be disciplined in managing your downside exposure.

Technology has been a lagging industry since late last year, but it is reappearing as a place of potential growth. The technology has seen significant outperformance in the year COVID or 2020, but has had weaker performance since then.

As several tech companies have recently posted strong earnings, overweighting your allocation to the sector may be appropriate.

Technology is one of those areas that has the potential to profit during inflationary environments. Tech companies may find it easier to pass price increases on to consumers, and their business models may be less sensitive to price and supply chain disruptions.

With the Delta COVID variant skyrocketing in many parts of the country, the lower risk of business disruption could be attractive to tech companies as well.

One of the biggest concerns about inflationary pressures is the reaction of the Federal Reserve. Steps the Fed could take include slowing its recent bond purchases or raising interest rates. While members of the Fed have signaled little near-term policy change, continued strong inflationary pressures may cause them to change their minds. And that could endanger the market at large. The Fed’s move to suppress inflation could lead to a pullback, forcing investors to take additional risk management measures.

Many investors view performance on an absolute return basis, but it’s important to think about the impact of inflation on all of your financial plans. In the short term, does your income have to increase to meet the rising costs of goods and services? Does your plan take inflation into account and will your portfolio be able to keep up with the rising costs? Now is a good time to hire a financial advisor again and ask if your plan is aligned with higher inflation expectations. With annual inflation of 3%, as we saw last year, your portfolio needs to do more to keep pace.

House prices rose 24.8% year-on-year in June, according to Redfin. If you were considering relocating and downsizing, now is the time? The home or smaller community you’ve been considering moving to has likely seen its prices go up as well, so beware of the potential shock of stickers.

Inflation can have a positive impact on your current net worth as most asset prices have gone up. This can give you more flexibility in your repositioning or relocation plan. Just keep in mind that if inflation continues to be an issue, downsizing your real estate might make it more difficult to track inflation because your smaller home may not see an increase in size. equity as important as a larger house.

Inflation in some sectors of the economy is likely to be temporary, but for others it may be more lasting. You may consider delaying purchases of temporarily higher priced goods or services due to a supply disruption. For example, you might want to delay adding a house due to higher lumber costs, or delay buying a used car because these areas of the market have experienced issues. supply chain. Likewise, trips in some regions are currently more in demand, which can lead to price increases. Delay can work as a tactic if you think the price increases in this area are temporary.

In summary, inflation is the most important story of the second half of the year. Investors should be aware of the opportunities and risks of navigating an inflationary environment.

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