If you are like most people these days, you have probably felt some effects of the 2021 inflation. You might have noticed that your income has less buying power than it did the year before. For those on a fixed income or living on your retirement income, you might be feeling the squeeze even more. You might also wonder if it is time to do a financial checkup on your investment portfolio to ensure that there will be enough to help you ride out this inflationary storm.
How Bad Is The 2021 Inflation?
You know that you feel the effects of inflation when you go to buy essential goods and services, and we will not even talk about the housing market. If you think that you have been feeling the crunch, you are right. As of August 2021, the current inflation rate is at 5.4%. At the same time last year, inflation was at 1%. In 2019, it was at 1.8%. The good news is that we are nowhere near the historical inflation of 10-13% that we saw in the early 80s. Nonetheless, this type of inflationary rate increase is enough to make any investor shudder.
Time For A Financial Checkup
Whether you are in your savings years or in your post-retirement years, it is time for you to do a checkup on your investment portfolio if you have not already. Many started investing when inflationary rates were at historical lows. Over the past several decades, inflationary rates have ranged between 1-3% on average, and in some cases were even negative. During these times of low inflation, many investors want to take a different strategy than they do when inflation is high. This is the main reason why it is time to take a look at all of your investments to make sure that they are set to ride out the next inflationary wave.
Making Investment Portfolio Adjustments
The first thing you want to do is to make sure that you are well diversified. Recently, the energy sector has seen a gain of 23.8% over the last year. By comparison, food has only risen by 3.4%. In addition, as the value of currency erodes, it is vital to make sure that you are investing in asset classes that tend to do well during inflationary periods.
Energy Sector
One of the sectors that traditionally do well in an inflationary period is the energy sector. People will not quit buying power when the prices rise, but they will pull from other resources to keep the lights on. Sectors like entertainment and luxury goods tend to see a decline. The most important thing to keep in mind is to stick with quality companies with a good track record for riding out storms.
Rental Property
Real estate is another sector that tends to do well, but the current prices might make people hesitate. One of the markets that tend to do well is the rental property market, as investors look for alternative sources of income. When investing in rental property, it is crucial to do your due diligence and consider whether renters in that neighborhood will be able to bear the prices you will have to charge.
Precious Metals
Many people think that investing in gold and precious metals is always a guarantee that their investment portfolio will beat inflation. If you believe that this may be a safe harbor, you need to know that this is not always a sure bet. From 1980 to 1984, gold investors lost an average of 10% against inflation. From 1988 to 1991, gold earned negative 7.6% returns against an inflation rate of 4.6%. During this time, REITs and commodities experienced a positive return.
At this point, no one can predict how high the inflation rates will climb before they finally start going back down again. So the best thing to do is to be proactive with your investments and retirement account. It is possible to survive and even come out ahead, but it might take a few adjustments to your portfolio.