Should inflation affect your investment movements? | Milton, MA Business Listings, Business Directory | Milton time
As you know, inflation has warmed up in 2021, after years of fairly flat – and low – numbers. And now, at the start of 2022, we are still seeing high prices. As a consumer, you may need to adjust your activities somewhat, but as an investor, how do you react to inflation?
First of all, it is useful to know the causes of this recent spike in inflation. This is essentially a case of basic economics – high demand for goods meeting insufficient supply, caused by material and labor shortages, as well as shipping and delivery bottlenecks . In other words, too many dollars for too few goods. Once supply chain issues begin to ease and consumer spending shifts from goods to services as the COVID-19 pandemic subsides, inflation is likely to moderate, but it could still remain above pre-pandemic levels throughout 2022.
Given this outlook, you may want to review your investment portfolio. Consider stocks first. Generally speaking, stocks can do well in times of inflation because corporate revenues and profits can rise with inflation. But some sectors of the stock market generally do better than others during times of inflation. Businesses that can pass higher costs on to consumers due to strong demand for their products — such as businesses that produce building materials or supply steel or other products to other businesses — can get away with it. Conversely, businesses that sell non-essential goods and services, such as appliances, sportswear and entertainment, may experience more difficulty when prices rise.
Of course, it’s always a good idea to hold a variety of stocks from various sectors, as this can help reduce the impact of market volatility on any sector. And to help counter the effects of rising prices, you can also consider investing in companies that have a long track record of paying and increasing stock dividends. (Keep in mind, however, that these companies are not obligated to pay dividends and may reduce or eliminate them at any time.)
Besides stocks, how can inflation affect other types of investments? Think about bonds. When you invest in a bond, you receive regular interest payments until the bond matures. But those payments stay the same, so over time rising inflation can eat away at your bond’s future earnings, which can also cause your bond’s price to drop – a concern if you decide to sell the bond. bond before its maturity. The impact of inflation is particularly pronounced on the price of longer-term bonds due to the cumulative loss of purchasing power.
However, Treasury Inflation-Protected Securities (TIPS) can provide some protection against inflation. The face value, or principal amount, of each TIPS is $1,000, but this principal is adjusted for changes in the US Consumer Price Index. So, during periods of inflation, your principal will increase, increasing your interest payments as well. When inflation drops, however, your principal and interest payments fall, but you will never receive less than the original principal value when the TIPS mature. Speak to your financial advisor to determine if TIPS may be right for you.
Ultimately, inflation can indeed be something to consider when managing your investments. But other factors, especially your risk tolerance, time horizon and long-term goals, should always drive your investment decisions. A solid investment strategy can serve you well whether prices are rising or falling.
This article was written by Edward Jones for use by Joe Parlavecchio, CFA, CFP®. Visit https://www.edwardjones.com/joseph-parlavecchio for more information.
Edward Jones, SIPC member.