How to protect your investments from inflation – Quartz
As inflation hits its highest rate in three decades, many wonder if rising prices are going to put a dent in their savings.
The money you have in your checking or savings account loses purchasing power as the cost of everything from microchips to sheets increases. But don’t panic. There is good news, at least when it comes to your investments, according to data compiled by Dimensional Fund Advisors.
“In the long run, most of the asset classes we’re looking at may have actually beaten inflation,” said Mamdouh Medhat, a researcher at Dimensional Fund Advisors, which oversees more than $ 600 billion and specializes in application of university research to investment. The company looked at a wide range of assets, including bonds, stocks and commodities for its inflation research.
Quartz spoke to several financial experts about ways – from stocks to homes to investing in yourself – to keep your savings intact as prices soar.
The stock market
In the long term, investing in equities is probably the best way to beat inflation, says Ben Carlson, director of institutional asset management at Ritholtz Wealth Management. Research shows that stock returns have tended to outstrip price increases, and this year was no exception: The S&P 500 Index of Large U.S. Companies rose about 25%, giving investors plenty of leeway. .
Despite their own rising costs, companies in the S&P 500 Index reported a profit margin of 12.3% in the third quarter, one of the best quarters on record since FactSet began tracking data in 2008.
“Businesses have experienced rising input costs and supply chain issues, but they have passed those costs on to consumers through higher prices,” Carlson said. “As long as these companies have pricing power, the stock market is sort of your best bet.”
Gold and bitcoins
Gold, along with bitcoin, an asset that some see as a digital form of the yellow metal, is often brought up in discussions about inflation. But many experts are reluctant to use either as a way to protect their savings.
Gold prices are rarely influenced by changes in inflation rates. Even though traders are worried about rising prices, gold has fallen about 1% this year. Even when Dimensional’s research found a correlation between commodities and inflation, the volatility of these assets meant their prices were too volatile to be worth it.
Some fear that price volatility will also make gold and crypto bad candidates for protecting savings from inflation. (That said, the price of bitcoin has roughly doubled this year, providing, shall we say, some cushion against the rising cost of living. But sometimes big price swings aren’t so favorable.)
Economist Allison Schrager, a former Quartz collaborator who is now a senior fellow of the Manhattan Institute, points out that bitcoin has only been around for a little over a decade, which means there is far too little data. to forecast the likely performance of crypto assets.
“Bitcoin and gold are kind of terrible hedges against inflation just because they’re so much more volatile than inflation,” she said. “It’s the problem of burning your house down to get rid of a mouse.”
Speaking of houses, people who bought one with a fixed rate mortgage might get away with it too, according to Carlson of Ritholtz Wealth Management. For the homeowner, it’s the opposite of buying a bond: you’re paying off the loan with money that is losing value at the same time that inflation could increase the value of your home.
“A fixed rate mortgage is currently a very good hedge against inflation,” he said. The average 30-year mortgage rate in the United States is around 3%, while home prices have climbed around 15% this year.
So far we have been talking about long term investments, which are supposed to be held for many years. But what if you don’t have that kind of time? Maybe you are planning to retire soon or are already retired, or maybe you have some of the money that you would like to use soon to buy a house.
In that case, experts say you might want to consider assets directly linked to inflation, like Treasury Inflation Protected Securities (TIPS), which are US Treasury bonds indexed to the consumer price index. If the CPI the consumer price index (CPI) increases, the principal of this bond increases; if the CPI goes down, the principal goes down. (In the UK, the government issues a similar security called index gilts.) TIPS have gained around 5% this year. Experts say they’re more likely to be of help if you have concerns about short-term inflation.
“Few assets have the capabilities that would make them an effective hedge against inflation,” except TIPS and inflation-indexed gilts, Medhat said. “What you need to do depends on your horizon, depends on your risk tolerance.” This is where consulting a financial advisor can be a wise move.
Your own career
Famous investor Warren Buffett is said to have said that your own career may be the best way to protect yourself against rising prices. “If you are the best teacher, if you are the best surgeon, if you are the best lawyer, you will get your share of the national economic pie regardless of the value of the currency,” Berkshire CEO Hathaway said at the time. of the annual meeting of shareholders of the company in 2009.
Coverage is not just what you earn now, but what you might earn later.
“I always try to remind people that one of their most valuable assets is their earnings, ”said Schrager, who is also the author of An economist walks into a brothel: and other unexpected places to understand the risks. “Your future income is an important part of your assets and it’s something you should invest in.”