Ways to Help Protect Against Inflation in 2024
By Daniel Baumgartner & Petra Peters
Inflation is a natural occurrence in an economy where prices of goods and services increase over the years. A small amount of inflation is healthy, but too much erodes the purchasing power of our money. This is why the Federal Reserve has been adamant about raising its lending rate to cool the economy and drive inflation down over the past 18 months.
Even though inflation has decreased considerably, investors still may wish to employ strategies that could outperform other asset classes in an inflationary environment. Since the U.S. economy has been resilient and the Fed’s goal of a steady 2% inflation level has yet to be achieved, such strategies may serve as a good hedge if inflationary pressures continue. Here are some ideas to help keep your portfolio growing.
1. Shift From Conventional Bonds Toward Stocks
Traditional bonds like corporates and even U.S. Treasuries can decline in market value during inflationary periods due to higher interest rates that often accompany inflation. Shift allocations more toward stocks, especially companies with low capital requirements and pricing power that can help preserve their margins when raw material or other costs of business rise. Companies that pay dividends could also be a good choice, since dividends may rise with strong economic growth.
Examples include stocks in energy, financials, or the luxury goods sector, where consumers are less concerned about price increases. Infrastructure-related companies where revenue increases are linked to inflation may also be worth a look. Increasing your international exposure to countries that are less U.S.-economy dependent may be another effective move.
2. Diversify Into Real Estate
Real estate investments are a historically reliable hedge against inflation since raw material costs, rents, and home prices generally rise with inflation. Rather than purchasing real estate outright, many investors gain exposure to this sector via Real Estate Investment Trusts (REITs), which are investments holding hundreds of properties or real estate-related investment vehicles. Investors may gain through the REIT’s price appreciation or dividends paid. REITs often carry a higher yield than bonds. Look for REITs with a broad and geographically diversified portfolio of commercial, residential, and industrial properties and those with low expense ratios.
3. Add Commodities to Your Investment Mix
Commodities may sound exotic, but they are really just the raw materials needed to produce goods and provide for our modern lifestyle. Raw material and energy prices often rise during inflationary periods. In fact, higher demand for goods and services, and therefore the raw materials, is typically the reason inflation occurs in the first place. Consider investments in a basket of commodity-related holdings or companies that produce the raw materials every economy requires. Examples include oil & gas companies, timber, utilities, and mining companies.
4. Let the U.S. Government Help With TIPS and I-Bonds
TIPS (or Treasury Inflation Protection Securities) are Treasury bonds issued and guaranteed by the Federal government. These bonds pay a set rate of interest and the principal amount is linked to the changes in the Consumer Price Index (CPI), so when the CPI rises, so does the principal. This is a two-edged sword, however; when the CPI falls, so does the value of the bond, so be careful. TIPS come in 5-year, 10-year, and 30-year maturities.
I-bonds are also issued and guaranteed by the U.S. government. With I-bonds, the yield on the bond is paid on a prorated monthly basis and is a combination of a fixed rate and an adjusted variable rate that changes with inflation. For the period of November 2023 - April 2024, the composite rate is 5.27% and changes every six months (so the rate will change again in April).
There are withdrawal restrictions, so read the rules on these bonds carefully. I-bonds can be purchased directly here.
5. Floating Rate and Senior Loan Securities
Other types of inflation-fighting fixed-income investments are so-called “floating rate” notes and senior loan securities. Similar to U.S. Government I-bonds, floating rate notes have yields that often have both a fixed-rate and an adjustable-rate component that is linked to a common index, like the CPI. This composite rate adjusts based on the provisions of the issuing company. Unlike I-bonds, these securities are issued by corporations, so there are investment risks involved. Most investors might be better off investing in a well-rated and diversified floating-rate security fund or ETF.
Senior bank loan securities are investments that hold bank loans to corporations that are repackaged together and sold to investors. Senior bank loans take priority over all other debt obligations of the borrower as well as preferred and common stockholder claims. Senior bank loans often come with floating interest rates and can offer higher yields and protection against inflation. Like the floating rate notes mentioned above, senior bank loans do carry investment risk, so investing in a diversified fund or index of these securities may be prudent.
We’re Here to Help
We understand these details can get confusing—but remember that you don’t have to decipher them on your own. The Terra Nova Asset Management team is here to guide you to financial freedom.
For more information about our services or to discuss your specific financial situation, feel free to reach out to us directly at 212-355-1234 or ppeters@terranovausa.com for the New York office (Petra) or 855-248-6630 or baumgartner@terranovausa.com for the New Jersey office (Daniel). You may also contact us here to schedule a meeting and we’ll get in touch with you soon!
About Daniel
Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust.
Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscape, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”
About Petra
Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.
Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.