FORT KNOX, Ky. — Is anyone else out there in financial land, like me, paying attention to the stock market these days?
Are you feeling the roller coaster ride of your money plans? Maybe you are looking for ways to develop a strategy on how not to lose all your retirement income? If so, you are not alone. Many are researching ways to protect their money against rising prices and the higher cost of living.
One economist has indicated that folks should be prepared for “the economic storm clouds and/or headwinds that have emerged.”
Whatever you do, though, don’t panic.
Historically, stocks tend to do well even during periods of inflation, often producing gains that beat inflation. Steve Hanke, a professor of economics at Johns Hopkins University, recently said, “The average annual return on stocks between 1990 and 2017 was 11%. Even factoring in the cost of inflation, the average annual return was 8%.”
There are multiple reasons for the disruptions in our stock market.
It’s no secret, geopolitical pressures such as the war in Ukraine, COVID, and friction with China have all contributed and possibly magnified risks. Who knows what our financial future will be next? Maybe a recession? It hasn’t been ruled out.
Some economists say we are experiencing a recession now while others feel we are still too close in the year to determine if a recession is on the horizon. However, it is suggested that a downturn is likely to occur after the first of the year.
If this happens, I think we know more now than we did in 2008 how to make a correction financially healthy, especially since we learned how to address the imbalances that were known to wipe out many investors in 2008.
Now is the time to strategize your long-term finances.
Be prepared for periods when there are market drops. Consider options available that can provide returns to outperform in this volatile market. It is important to diversify assets and allocate a smart strategy that makes sense for your plan to succeed and can meet your goals.
What are some investment strategies that make good hedges against inflation? There are several options to consider. We all know risk is not guaranteed, but there are protective measures that can be implemented to reduce risk and counter inflation. Let’s look at a few:
Consider companies that pay solid dividends.
When the market is volatile, it’s good to consider dividend paying stocks. Dividend stocks are a small portion of a company’s profits that provides distributions of cash from earnings to shareholders. Dividend stocks have significantly outperformed the market this year despite inflationary pressures.
Commodities.
Commodities are generally used as merchandise that investors or traders can buy and sell directly on the spot, also known as exchange-traded funds that can be easily traded. Examples that have been viewed as good hedges against inflation are precious metals such as silver and gold, which tend to hold their value well.
Raw materials, used to manufacture finished goods and agricultural products, such as grain, natural gas, beef and coffee, are other considerations.
Commodities also offer a portfolio of broader goods and services that hedge against inflation. These include:
1) Real estate
· Inflation impacts real estate both positively and negatively, depending on various factors. It affects construction and purchase costs; profit margins decrease as materials, equipment, supplies and land increase. But it is still considered to be a tried-and-true inflationary hedge. Investors can capitalize on cheap mortgage rates, passing rising costs to tenants by raising rent prices while benefiting from rising home values over the long term. Land and property values are known to increase during inflation.
2) Health care
· It has been said the health care industry is “undervalued.” Consider companies that have prospects for growth. Some examples included new technology companies, such as drug developers in antibody drug treatments to fight illness, biochemical tools to develop new vaccines and medicines, and medical service providers that are known to improve health based on patient need. Invest in companies that have the potential to transform the delivery of future products and services.
3) U.S. Treasury Inflation-Protected Securities (TIPS)
· TIPS are government backed bonds that increase in value as the Consumer Price Index rises. Some financial analysts say they may not be a good choice during inflation, but TIPS offer interest rates that are indexed to inflation, meaning their interest payments rise along with the inflation rate. So, when inflation rises, the interest rate paid goes up. When prices fall, interest rates decline.
4) Savings bonds
· Many financial gurus say you can beat inflation by purchasing bonds. We know they offer lower returns than stocks, but if you are in or close to retirement, the rate of return is more consistent than performing stocks. Bonds are typically considered to be a safe investment because the value doesn’t decline, which makes them a stable investment during inflation and or periods of uncertainty.
· The I Bond is less likely to lose value and is backed by the U.S. government. The variable rate right now is 9.62% through October. You can buy these only through the U.S. Treasury at https://www.treasurydirect.gov. Purchase amounts start at $25, and you can invest as much as $10,000 a year. However, if you cash in before five years, you will lose interest.
5) Discounted shares
· Discounted shares are stocks issued in the market and sold for less than nominal value; what financial experts call par value. The difference between the greater par value and the lesser issue price is considered the discount, which is selling shares below the fair market value. Investors should look for quality stocks with sound fundamentals and strong prospects.
All these products are recommendations and don’t apply to everyone because each of us has our own distinct goals and risk tolerances. Therefore, I advise that you seek counsel from a professional and discuss your financial plan before investing. You will want to take into consideration that the Federal Reserve is likely to continue increasing interest rates in an effort to combat inflation. As interest rates increase, borrowing becomes more expensive, making some strategies riskier.
Be an investor that understands that this inflationary period is temporary. For those nearing retirement, portfolios should be shifted to safer cash and fixed income investments. Do your homework; invest in companies that can make growth to ensure your changes are in alignment with personal goals.
Lastly, if you have any financial questions, consider making an appointment with an Army Community Service professional financial counselor who can help educate and assist you in making informed financial decisions.
To schedule an in-person or virtual appointment, call 502-624-5989.
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