Protecting Yourself Against Inflation

The Social Security Administration announced a 5.9% cost-of-living adjustment (COLA) for benefits in 2022. This represented a major increase after averaging under 2.5% for the past 10 years. We’ve experienced significant economic inflation in the past year and the new COLA reflects the rising costs of living.

So, what does this mean for investors? How should you be protecting yourself against inflation? Most financial planners agree that you should not panic. That’s generally a smart recommendation for any investor. You should avoid making any drastic moves to hedge against inflation. However, you need to understand the market. There may be some adjustments and moves you can make to better protect yourself against inflation in 2022.

Some experts believe that inflation rates will subside somewhat by the end of the year and continue to go down in 2023 and 2024. Then again, last year saw a lot more inflation in personal consumption expenditures than many expected.

Long-Term Planning vs. Short-Term Reactions

Most investors are saving for retirement and are building long-term investment plans designed to handle any short-term bumps in the road. Inflation certainly hinders some investments in the short-term, but a solid investment plan will be focused on long-term growth and sustainability despite any market ups and downs along the way. Nobody knows exactly how long this inflation period will last. The important thing to remember is that you are focused on the future. Don’t make drastic moves now that could derail your overall plan.

If you are looking for smart, reliable and relatively conservative long-term strategies, there are a few investment options to consider:

TIPS

Treasury inflation-protected securities (TIPS) have been around since 1997. The principal of TIPS actually increases with inflation and they pay a semiannual fixed interest rate. The rates are generally below those of standard Treasury bonds, but TIPS can be a sound conservative strategy for a long-term investor. There are also some corporate inflation-protected securities (CIPS), which provide similar inflation-protection features.

Real Estate

Real estate is almost always one of the most dependable long-term investments. Investing in real property (buildings, residences and land) or REITs (real estate investment trusts) is usually a good safe hedge against inflation. Properties will continue to appreciate in value over time.

Stocks

Many stocks will outpace inflation over the long run. You have to be careful and strategic with any short-term and long-term stock investments. Again, avoid any drastic moves and don’t buy and sell out of panic. Build a strong diversified portfolio that can weather any storm and then make strategic transactions and adjustments when necessary.

Gold and Other Commodities

Gold is often viewed as a popular inflation-hedge investment. It’s not as volatile as the stock market and the logic supports the idea that if consumer prices are going up, so will the prices of gold and other precious commodities. Though they may have a small place in your diversified portfolio, it’s rarely recommended by any financial advisor to put all your eggs in this basket. Gold, in particular, is a very speculative investment that doesn’t always pan out as hoped (pun intended).

Inflation is here, but it’s not time to panic as an investor. Build a sound long-term wealth management plan and keep your focus on future financial independence. The markets will always be a roller coaster ride. Don’t jump on or off the ride recklessly. Understand the trends. Make smart moves when they make sense. Stay focused on the long-term success of your plan and it will pay off in the end.

For help with your financial plan and retirement savings strategy, turn to Illumination Wealth. Contact us today.