Inflation-Proof Your Portfolio

How you can craft an investment plan that keeps pace

Consider these strategies to help inflation-proof your investments:
Engage in portfolio allocation. Morningstar’s Director of Personal Finance Christine Benz says it’s important to analyze the mix of stocks (or equity mutual funds), bonds (or fixed-income mutual funds), and cash among your holdings. “You have to make sure you have a position in stocks to outpace inflation—even in retirement,” she points out. The old rule of thumb is to subtract your age from 100 in order to find a suitable percentage of stocks or equity funds for your retirement savings. “That’s not a bad starting point but as key as age is, it isn’t the sole determinant. You have to factor in your tolerance for risk and your own personal needs as well,” adds Benz.

Invest in fixed-income investments that keep up with inflation. Bonds typically pay investors a set rate of interest. For that reason, fixed-income investments can be particularly vulnerable to inflation over time. Low-risk Treasury Inflation-Protected Securities or TIPS and I-bonds’ returns, however, are linked to the inflation rate to ensure a real return on your investment. Benz maintains your TIPS holdings should depend on the size of your portfolio. “It’s possible that someone in retirement might hold 20% to 30% of his or her bond portfolio in TIPS with the explicit goal of protecting against inflation—further out from retirement would probably require a lower percentage.”

Include commodities and real estate as part of your asset mix. Like stocks, commodities and commercial real estate have proven track records to keep up with inflation. Raw materials and natural resources—corn, oil, and gold—tend to rise in price when inflation heats up. In the case of real estate, landlords are able to adjust rents for offices and commercial space when prices are on the rise. One caveat: individual commodities and real estate prices can be very volatile. The best strategy is to add a bit—5% to 10%—to your portfolio through diversified ETFs or mutual funds that hold a varied portfolio spread among many holdings.

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