Shield your portfolio from inflation
Investors fear inflation in the same way Superman dreads a pile of kryptonite. Just as the mysterious substance weakened the Man of Steel, a persistent rise in prices can diminish the strength of an investment portfolio.
Here are four ways to hedge against inflation.
Treasury inflationprotected securities (TIPS)
The appeal of TIPS is that in inflationary periods, they “pay out more in interest and increase in value,” says Morningstar portfolio strategist Amy Arnott. The principal value (the initial price you pay for the bond) adjusts higher when inflation, measured by the Consumer Price Index, increases. The interest you receive also rises because it’s based on the adjusted principal. You can purchase TIPS directly from Uncle Sam at www.treasurydirect. gov or invest in Schwab U.S. TIPS ETF (symbol SCHP), a low-cost exchangetraded fund ideal for owning a broad basket of TIPS.
Gold
The precious metal has a reputation for retaining its value when the dollar
declines or loses purchasing power. Although gold gets kudos as an inflation hedge, its performance during inflationary times is mixed. Gold tends to perform best during bouts of extreme inflation, such as in the 1970s when oil prices soared. It fares less well during more muted inflationary periods. Still, earmarking a small portion of your portfolio to gold makes sense as an insurance policy.
To get exposure to gold bullion itself, consider iShares Gold Trust (IAU), which tracks the daily price movement of the yellow metal. Or you might invest in gold-mining stocks, says Axel Merk, president and chief investment officer of Merk Investments. When the price of gold is rising, he says, the profits of gold miners increase because the cost of getting the gold out of the ground remains fixed. Mining company Newmont (NEM) is a pro-inflation stock recommended by Bank of America.
Bitcoin
The virtual currency has been growing in popularity as an inflation hedge, held out as an alternative to gold. But it’s best for investors who have a speculative bent and are able to stomach massive volatility, and it should be limited to the smallest slices of your portfolio.
Most brokerages don’t allow clients to buy bitcoin directly, but you can gain exposure through Coinbase, a crypto exchange, on the Robinhood trading app or via products such as Grayscale Bitcoin Trust (GBTC).
Real estate
Property prices and rents charged by landlords typically go up during inflationary periods, making real estate a popular investment if you want to outrun inflation. Over the past 30 years, an index of U.S. real estate investment trusts posted bigger gains than the S&P 500 in five of the six years when inflation was 3% or higher, according to data from fund company Neuberger Berman.
Consider Vanguard Real Estate ETF (VNQ). It owns publicly traded REITs including Crown Castle, which leases communications infrastructure such as cell towers, and Equinix, which specializes in data centers.
Dan Milan, managing partner at Cornerstone Financial Services, is bullish on Simon Property Group (SPG). Simon’s upscale malls, he says, have held up better and can command higher rents than lower-end malls. Investment firm Stifel is bullish on self-storage real estate investment trusts, such as CubeSmart (CUBE) and Extra Space Storage (EXR).