Turn on any newscast or click on any business or financial story lately and you’ll hear a lot about inflation.
Most of us know it as the decline of purchasing power.
The cost of most things rises over time.
Think about how many gallons of gas you could buy for $20 in 1999 (the answer is about 20 gallons). Now, consider how many gallons that same $20 will buy you right now (and try not to weep!).
But what about inflation’s cousin, stagflation?
What is Stagflation?
Stagflation is a clever combination of two words: “stagnant” and “inflation.”
The term refers to a condition in which an economy has inflation, slow (or stagnant) economic growth, and a high joblessness rate.
An economy that has a high unemployment rate coupled with a gross domestic product (or total economic output) of either 1% or -1% is in the throes of stagflation.
This measure is tracked by the grim-sounding Misery Index.
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What Steps Could Help Protect Your Portfolio?
So, what approaches do investors use to help protect their portfolios against the harmful effects of each of these economic phenomena?
Inflation: When prices are rising, investors tend to put their assets in high-growth stocks, gold, and U.S. Treasury inflation-protected securities (TIPS).
These investments offer potential returns that exceed the inflation rate.
Stagflation: As during times of inflation, many investors seek to put their money in riskier assets (like high-growth stocks and even some commodities) during times of stagflation and tend to avoid corporate and U.S. government bonds, whose interest rates won’t keep up with the inflation rate.
Foreign bonds may be another attractive option.
What About Deflation?
Deflation is basically the opposite of inflation.
Instead of the rising prices associated with the latter term, deflation indicates a decrease in the prices of goods and services.
While deflation may seem positive, especially after periods of high inflation or stagflation, it’s often a sign of an unhealthy economy.
Deflation is commonly associated with recessions, decreased consumer spending, and even increase unemployment.
Some commonly used hedges against deflation include high-quality corporate bonds, stocks of companies in defensive sectors (such as health care and utilities), and stocks that pay regular dividends.
Cash is another option in a deflationary environment.
Get Professional Assistance to Help Protect Your Portfolio
Currently, inflation seems to be high and stagflation possible, but deflation is unlikely in the near future.
However, economic conditions could change quickly.
Partnering with a professional advisor to create a long-term financial plan will help you be better positioned for shifting conditions while giving you a trusted partner to rely on when it’s time to make changes.