Prices are rising everywhere with inflation. Except in your 401(k) | Smart Change: Personal Finances

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The New York Stock Exchange is seen in New York, Thursday, Feb. 24, 2022. Stocks have been shaky this year, with the S&P 500 at one point falling more than 10% from its all-time high, mostly on concerns of inflation. (AP Photo/Seth Wenig)


Seth Wenig


NEW YORK (AP) — Inflation doesn’t discriminate. Just as it squeezes everyone’s portfolio, it affects nearly every investment in a retirement account.

Stocks have been fragile this year, with the S&P 500 at one point falling more than 10% from its all-time high, largely on inflation concerns. Bond prices also fell. Before gold’s recent surge due to Russia’s invasion of Ukraine, the metal renowned as an inflation protector had just had its worst year in six years, even though inflation had reached its highest level in generations.

The reality is that there is no perfect playbook for how to invest in a high inflation world. But many on Wall Street see areas of the market that may hold up better than others, if not outright succeed.

This marks a turnaround for investors, who have grown accustomed to years of low inflation that haven’t weighed on their earnings much, said Gargi Pal Chaudhuri, head of iShares investment strategy, Americas, at the giant. the BlackRock investment. “Going forward, I think that level which was 1.5% to 2% is likely to be closer to 3%, and you need to start thinking about where you can move,” said she declared.

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That doesn’t mean investors should start trading their retirement accounts, after a long-term buy-and-hold strategy has worked so well for years. But they may want to shade their portfolios in certain directions, including parts of the stock and bond markets that can actually benefit from inflation.

Here are some of the options:

BONDS LESS THREAT BY INFLATION

Bonds are supposed to be the safe part of anyone’s portfolio. But when inflation is high, the fixed payments they make in future years will buy fewer things.

Expectations continue to rise for how many times the Federal Reserve will raise interest rates this year to curb inflation, with consumer prices 7.5% higher in January than a year earlier . When rates rise, newly issued bonds pay more and bonds already in bond fund portfolios suddenly look less attractive, driving their prices down. Vanguard’s Total Bond Market Index fund has already lost 4.2% this year on Thursday.

It can be a shock to lose money on bonds, but investors shouldn’t give up on them, Chaudhuri said.

“At the end of the day, bonds always give you that ballast,” she said. “They are still that ultimate diversifier that will still work in an environment where stocks are falling significantly.”

Higher rates generally hit longer-term bonds harder because they lock investors into lower rates for longer. Shorter term bonds may offer some protection.

The US government offers bonds that protect against rising prices. When an investor buys Treasury inflation-protected securities, also known as TIPS, the principal rises and falls over time with the consumer price index. The same applies to interest payments based on this principal amount. The downside is that TIPS still offer negative yields, with 10-year TIPS lately hovering around -0.50%.

Another type of government bond, called an I-bond, can be more lucrative. It pays interest compounded in two parts: one that rises and falls with inflation, which resets twice a year, and another that is fixed when the bond is purchased. The I-bonds currently available pay nothing on this second part, but the first is so high that they currently pay a composite annual rate of 7.1%. However, these bonds are subject to limits and cannot be cashed for one year. Investors also lose three months of interest payments if they cash out before five years.

PRODUCTS THAT CAN BURST

Some commodities have performed well during periods of high inflation in previous decades. Surprisingly, gold isn’t always one of them.

Its price fell about 4% last year, even as inflation accelerated rapidly. And it yo-yoed through early 2022, before concerns about Russian aggression against Ukraine sent it skyrocketing.

“Once inflation is already high, gold’s hedging power isn’t as strong” against inflation, said Rich Weiss, chief investment officer, multi-asset strategies, at American Century Investments.

This may be because the Fed’s usual medicine for high inflation – higher interest rates – can harm gold. When bonds earn more interest, investors may be less inclined to put their money in gold, which earns them nothing.

Other commodities have had better track records. “It’s almost tautological,” Weiss said, because rising prices for oil and other commodities are often a major reason for inflation spikes.

Some on Wall Street suggest considering investments that track a wide range of commodities, such as some specialist ETFs, although these may have higher expenses than stock and bond funds.

STOCKS THAT INCREASE WITH INFLATION

If the prices of oil and other commodities rise with inflation, it is likely that the outlook for the companies that produce them will rise as well. This is why several strategists suggest focusing in particular on energy stocks.

Within the S&P 500, energy stocks have jumped more than 22% this year, while the overall index is down just over 8%.

Other sectors of the market that look relatively cheaper are also likely better bets in a world with high inflation and rising rates, say UBS Global Wealth Management strategists. Stocks that look expensive, such as big tech stocks after their strong multi-year run, helped by low interest rates, are likely to be hit harder.

Financial stocks have not been hit as hard as the rest of the market this year, as rising long-term rates raise expectations of bigger earnings from loans. But even there, the risk remains. Banks tend to make more money when they can borrow money cheaply at short-term rates and lend it out at higher long-term rates. If this gap closes, they can be harmed.

Emerging market stocks have also done well in past instances of high inflation, in part because many of these companies are commodity producers. They also seem cheaper than the US stock market, which has been the dominant force in the world for years.

“COVID has stopped us from physically traveling overseas,” said Weiss of American Century, “but you really want to start traveling overseas with your assets.”

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