Everywhere we look, we see prices skyrocketing across the board. This has been essentially a global phenomenon and practically in all sectors. The average inflation rate over the past 100 years in the US has been approximately 2.6%, however, the current inflation rate is approaching 5.4%, more than double the average. Here are 5 steps we can take to protect ourselves and invest in this period to keep up with inflation.
1. What are your alternatives: Generally, in life everything comes down to what your options are. The first step to navigate this period is to consider all your alternatives. Review your current investments and see what investments are keeping up with inflation. If you are invested in an asset class that is earning less than the current inflation rate, you should re-evaluate such investments. Any investment should keep up with inflation or better.
2. Cash is trash: In an inflationary environment, saving cash is one of the most devastating things you can do to your investment portfolio in an inflationary environment. The rule of thumb is not to let your cash stockpile exceed 10% of your total portfolio.
3. Asset Allocation & Diversification: Properly planning your asset allocation and diversification with the right investment professional is key to your investment decisions during an inflationary period. Even though this is important in all investment environments, it is more important during a period of high inflation.
4. Where to invest: Investing in the following sectors is paramount in this inflationary period. i. Commodities ii. Income producing assets iii. Low interest levered assets iv. Equities v. Real Estate Investments Trusts (REITs) vi. Treasury Inflation Protected Securities (TIPS) vii. Income Producing Real Estate. These asset classes have proven to adequately protect investments during high inflation periods.
5. Dollar Cost Averaging and Think Long Term: These are time tested concepts that are even more crucial in an inflationary environment. During this period, we will see investment options bouncing up and down. Continuous investing and investing for the long term will assist us in navigating this inflationary period.
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