Financial focus: should inflation affect your investment movements? | Columns
As you know, inflation rose in 2021, after years of fairly stable – and low – numbers. And now, at the start of 2022, we are still seeing high prices. As a consumer you may need to adjust your business a bit, but as an investor how should you react to inflation?
First, it is useful to know the causes of this recent inflationary spike. This is essentially a case of the basic economy – a high demand for goods meeting an inadequate supply, caused by shortages of materials and labor, as well as shipping and delivery congestion. . In other words, too many dollars for too few goods. Once supply chain problems start to ease and consumer spending shifts from goods to services as the COVID-19 pandemic abates, inflation is likely to subside, but it could remain above pre-pandemic levels throughout 2022.
Given this outlook, you may want to review your investment portfolio. Consider the actions first. Generally speaking, stocks can perform well in times of inflation, as companies’ income and profits can increase with inflation. But certain sectors of the stock market generally do better than others in times of inflation. Businesses that may pass higher costs on to consumers due to high demand for their products, such as businesses that produce building materials or supply steel or other products to other businesses, may to succeed. Conversely, businesses that sell non-essential goods and services, such as appliances, sportswear, and entertainment, may have a harder time when prices rise.
Of course, it’s always a good idea to own a variety of stocks from various sectors, as this can help reduce the impact of market volatility on any given sector. And to help counter the effects of rising prices, you can also consider investing in companies that have a long history of paying and increasing stock dividends. (Remember, however, that these companies are not obligated to pay dividends and can reduce or eliminate them at any time.)
Besides stocks, how can inflation affect other types of investment? Think about the obligations. When you invest in a bond, you receive regular interest payments until the bond matures. But these payments stay the same, so over time rising inflation can weigh on your bond’s future income, which can also cause your bond’s price to drop – a concern if you decide to sell. bond before maturity. The impact of inflation is particularly marked on the price of longer-term bonds due to the cumulative loss of purchasing power.
However, Inflation-Protected Treasury Securities (TIPS) can provide some protection against inflation. The face value, or principal amount, of each TIPS is $ 1,000, but that principal is adjusted for changes in the US Consumer Price Index. So, during times of inflation, your principal will increase, also increasing your interest payments. However, when inflation goes down, your principal and interest payments go down, but you will never receive less than the original principal value when the TIPS matures. Speak to your financial advisor to determine if TIPS may be right for you.
Ultimately, inflation can indeed be something to consider when managing your investments. But other factors, especially your risk tolerance, time horizon, and long-term goals, should always drive your investment decisions. A solid investment strategy can help you whether prices go up or down.
This article was written by Edward Jones for your local Edward Jones financial advisor. Edward Jones, SIPC member