How to manage financial assets amid looming inflation
With rising inflation, there is a need to find proven ways of managing and preserving the value of financial assets.
The Coronavirus pandemic in 2020 culminated in the world being awash with trillions of dollars of easy money in 2020; now, these funds are going away as the world recovers from the economic effects of the virus. These funds were meant to alleviate suffering and propel the global economy into recovery.
The economic recovery was accompanied by an increase in the demand for goods and services, followed by brewing inflation as prices of foods and commodities rose.
The U.S Bureau of labour statistics reported that inflation had hit a 40-year high in December 2021. With the inflation rate at 7%, economic experts predicted rising prices might hover throughout 2022.
Rising inflation figures are catastrophic to the market because of the uncertainties it breeds. As usual, the tensions contributed to the bearish season in crypto and other markets in the latter days of 2021.
Inflation is the increase in goods and services over a particular period. Inflation comes with a loss of purchasing power if the income of consumers does not keep up.
From the consumer's perspective, people will observe that prices for the same amount of groceries have gone up; those who want to book a vacation trip will notice a price increment.
An inflation rate of 7% underpins the economic outlook facing Americans and the world. The Americans receive and save their salaries, income, and retirement earnings in U.S dollars; thus, a corresponding 7% drop in purchasing power is expected to follow the current inflation rate.
If the 2008 economic crisis has taught the world anything, it is the fact that there are possible ripple effects from any economic misadventures faced by the United States.
As inflation barks in the corner, common sense requires investors and consumers to seek ways to manage their assets.
Here, investment options investors can take to profit from inflation will be tabulated. The article will feature a host of financial decisions that investors can make.
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Top 6 ways to manage assets under inflation
Inflation presents challenges to consumers and investors because it has unpredictable effects on various asset classes.
Inflation affects fixed debt securities most because it devalues interest rates and principal payments. When the interest rate becomes lesser than the inflation rate, investors in the money lending business start losing money after adjusting for inflation.
The above statement is relevant when managing assets under inflation because the profit margin from inflation-hedge assets should be readjusted to reflect the inflation rate.
Thus, effective management of assets amid inflation entails investing in assets assured of rising value or cash inflow; an example is a rental property subject to rent increase as inflation increases or even an energy pipeline that charges rates on inflation surge.
A comparative study of experts' opinions that the consumers and investors can follow is shown below. Investors can use the following steps to manage assets and mitigate risks under inflation:
1.Review your portfolios
Now is the time to go back and review all financial holdings and goals. It is essential to review portfolios because most financial goals are prepared with an inflation rate of 3%, which is unsuitable for individuals who plan to retire sooner.
It is imperative to call financial advisors and urge them to develop a financial goal that reflects current realities. They should also review the portfolios to show where you are most invested.
The founder of financial lattice, Seth Mullikin, iterated that clients should have portfolios to withstand inflation. He advised that it may not be an excellent financial decision to invest a large chunk of assets in a fixed income because of safety concerns.
The end goal is to invest, review the portfolios and divest all holdings so that the returns can outpace inflation.
The inflation uncertainty might lead to stock sell-offs, but that may not be the best step to managing assets amid inflation.
Stocks have historically proven to be a good inflation hedge as their returns have kept pace with inflation. So with inflation around the horizon, it may be wise to hold on to stock portfolios or even buy more.
It is worth stating that all stocks are not equal as some perform better under inflation than others. For instance, high-paying dividend stocks tend to move downward during inflationary times.
John Scherer, a financial planner and founder of Wisconsin-based Trinity Financial Planning, advised that investing in a company's stocks during inflation makes more sense.
According to him, companies can pass the increased cost of production to consumers and still maintain their profit margin and higher stock prices. Mr Sherer then advised investors to divest portfolios by investing in stock mutual funds.
Early starters who want to invest in stocks should know that starting is easy. Potential investors can always sign up through a brokerage or trading platform.
The choice to invest in stocks to beat inflation should be guided by the end goal because, as noted by Amy Arnott, a portfolio strategist at Morningstar, stocks may be good for the short term, but it suffers in the short term if inflation spikes.
3.Check out TIPS
TIPS which stands for Treasury Inflation-Protected Securities, might be a safety net for investors with a low-risk tolerance and looking for a short-term inflation hedge, especially boomers close to retirement.
TIPS are a type of bond structured to follow the rise and fall of inflation; thus, as inflation increases, the interest rates paid on the bond increase and vice versa.
These particular bonds are an excellent addition to savings or retirement portfolios because the U.S federal government backs them. Ms Arnott revealed that TIPS is one of the best inflation hedges for the average investor because it directly links with the Consumer Price Index (CPI - a measure of prices spent on goods and services over time).
Anyone can buy and hold TIPS; investors can purchase them directly from the U.S treasury, brokerage accounts, mutual funds and exchange-traded funds (ETF).
Potential investors should know that TIPS' interest rates are paid twice a year and usually issued in a 5, 10 and 30-year maturity period.
4.Real Estates are options against inflation rise
Real estate is one of the most popular ways to manage assets under inflation because anyone can access it. Real estate is used to hedge against inflation because rent payment increases with inflation.
Investors do not have to acquire apartment buildings before investing in real estate. Anyone interested in real estate investments can invest through Real Estate Investment Trusts (REITs). Interested investors can also access it by buying stocks from mutual funds that hold REIT investments.
The post-pandemic era may have shifted the role of real estate to manage assets under inflation. There are concerns that companies are choosing to adopt remote work or hybrid models, which has left many office buildings and retail spaces in limbo.
Real estate may have proved the naysayers wrong during the lingering inflation of the 1970s. Still, the 2008 economic crisis shows that real estate is vulnerable to rising interest rates - a monetary policy used by the government to curb inflation.
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5.Leveraged loans and debt obligations
Leveraged loans are loans extended to individuals or companies with poor credit history, so banks use floating interest rates rather than a fixed rate, as seen on regular loans. Financial institutions can always increase the interest rate to correlate with inflation using a floating interest rate.
Mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) are other options for managing assets amid inflation. MBS and CDOs are structured mortgages and consumer loans; investors do not own the debts. Instead, they invest in securities that hold these loans as the root assets.
Leveraged loans, MBS, and CDOs are risky options for the small players who may not know much about the market. The significant minimum investments may also deter interested investors; however, people can still access these securities through mutual funds or ETFs that focus on these assets.
Commodities like oil and gold may also serve as an inflation hedge since there is an expected price increase in these commodities with inflation. Arnott added that these commodities' return on Investment (ROI) might be high, but they are a risky asset class. According to financial experts, their prices are predominantly determined by forces of demand and supply, which is highly unpredictable.
There has been a comparison about a better inflation hedge between Gold and Bitcoin; both possess a track record worth studying, but none can effectively serve investors with a short-term financial goal.
Investors can quickly assess the above commodities by investing directly or through mutual and exchange-traded funds.
Investors look for the best way to manage assets amid inflation because they want to protect the value of their portfolio and increase ROI.
Effective management of assets under inflation might also expose investors to the advantage of portfolio diversification. Diversified holdings ensure a spread of risk across the board, a firewall to prevent massive loss.
Investors are advised not to change course and goals without proper financial advice. There is no need to be obsessed with inflation and rattle the risk-tolerance attitude; the ramifications may be damaging.
In summary, there is no need to shift focus to long-term stocks if the retirement plan is around the corner. In a similar spirit, an investor with a goal of high yield investment should not consider TIPS.
The best way to manage assets under inflation is to evaluate all goals and timetables thoroughly.