Inflation is way up. And "stagflation" is Wall Street's buzzword du jour.
To try to tamp down inflation, the Federal Reserve boosted its benchmark interest rate by 0.75% on Wednesday.
That was the Fed's largest rate reset since 1994. And it follows a quarter-point jump in March and a half-point hike in May.
Inflation: Stick With Your Plan
So, what if anything should you do to protect your portfolio from inflation? After all, in the past week alone, the market in the form of the S&P 500 is down about 8%, going into Thursday.
Inflation is now soaring at an 8.6% annual rate, the government reported last week. That's the fastest cost-of-living rise in more than 40 years.
It raises the ugly specter of a one-two punch of high inflation and low economic growth — a combination dubbed stagflation.
Leading financial advisors and strategists gave us recommendations about steps individual investors should take with the diversified funds portion of their portfolios to cope with inflation.
Several warn shareholders to avoid big moves. "Sheaff Brock is advising clients to stick with their overall financial plan," said Dave Gilreath, managing director and chief investment officer of that investment advisory firm.
Financial planner Michael Garry, chief executive of Yardley Wealth Management, said, "Changing asset allocations based on the premise that we think the economy is going to be plagued by stagflation, or not, doesn't work enough in real life to make sense for us to make those moves."
Advisors who do recommend taking action generally concur that any steps should be small adjustments that fit within your overall investment plan.
And as always such steps should suit your needs, time frame, risk tolerance, goals and other circumstances.
Inflation: 3 Traditional Coping Steps
To brace for inflation, LCM Capital Management urges clients to take historically traditional paths. Clients have added money to SPDR Gold Shares ETF and shares in gold mining stocks, says chief executive officer Gary Wozny.
GLD tracks the price of gold bullion. The ETF's trust holds physical gold bullion as well as some cash.
LCM clients who are more concerned with inflation have also added to energy stocks and utility equities.
Two More Steps For Taming Inflation
Sheaff Brock's Gilreath says real estate investment trusts (REITs) and preferred stocks are among the tools his firm recommends for combating inflation and stagflation.
"The largest REIT ETFs have been bloodied and dropped in price by 24% this year," Gilreath said. "Many offer dividend yields of about 3%. A couple offer a little more. The combination of attractive yield, inflation hedge, plus price recovery potential make the group compelling."
Gilreath also likes the fact that you can restrict yourself to REITs that focus on U.S. property. That buffers them from geopolitics. In addition, REITs own tangible assets. Historically, those have been a hedge against inflation. "Third, most commercial leases contain annual rent escalation provisions, so a REIT's income tends to grow over time," he said.
REIT Yields
Fourth, REIT dividend yields tend to be relatively high, he says. That's more attractive when their share prices are not eroding.
Preferred stocks are hybrid securities. They pay dividends that are fixed like bond interest. But over time preferred shares tend to grow in value more like common stock than bonds.
Gilreath likes them for their income. Preferreds are issued mainly by banks and other financial services companies, Gilreath says. Many have strong credit ratings. "Banks in the U.S. have better balance sheets now than nearly anytime in recent decades," he said. "But preferred stocks have only been cheaper than today twice, during 2009's Great Financial Crisis and briefly during the pandemic sell-off."
Actively managed funds and ETFs can shop for institutional securities with better yields and prices, he says.
Gilreath, who also runs a preferreds ETF, did not recommend specific funds for the sake of neutrality. But one high yielding preferred stock ETF is $512 million Virtus InfraCap U.S. Preferred Stock ETF. Its 12-month trailing yield was 8.36%. Its SEC yield was 8.87%. But in this beaten down market, its year-to-date return, based on price, was negative 13.57%.
Foreign Stocks, Fixed Income: 4 Steps
To cope with inflation, Andy Kapyrin, co-CIO of RegentAtlantic, says that in general he is advising investors to increase weightings in stocks from foreign developed markets and emerging markets. He also recommends municipal bonds and what he calls opportunistic fixed income strategies.
His thinking: "Foreign stocks are less heavy in tech and heavier in energy, materials, industry and finance. Those fields are likely to benefit from high inflation and higher interest rates. The tax benefit in muni bonds becomes more valuable when interest rates are higher. At the same time, inflation helps ease some of the financial pressures states and local governments face. Opportunistic bond strategies tend to focus on credit, including floating rate loans. That space starts to look defensive in a high inflation, higher interest rate environment."
Long-Term Mutual Funds
IBD has often explained that investors should avoid deviating from their overall plan with big changes to the long-term mutual funds in your portfolio.
With your individual stocks, you buy, hold, add or sell based on the rules of a time-tested strategy that tells you when to get in and out of securities.
A key risk in trying to market time with funds — whether it's to cope with inflation, stagflation or for any other purpose — is that shareholders typically end up buying too high and selling too low.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.
