How investors can cope with inflation in their portfolio

Don’t make any sudden investment moves. You may have more inflation protection than you think.

If you’re old enough to remember the high inflation of the 1970s, you’re likely watching the current increase in prices for goods and services with some unease. Indeed, inflation hit a 40-year high in 2021. While we’re unlikely to return to the double-digit inflation growth of the 1970s, the current inflationary period we’re experiencing is expected to peak mid-year and remain above average for the rest of 2022.

What’s driving inflation?

The Federal Reserve stopped describing inflation as “transitory” in late 2020, signaling that its board members expect higher costs will stay with us for a while. The pandemic brought many changes that are spurring higher costs. People are living and working differently, including spending more time at home. That’s leading us all to order more goods from our couches instead of putting money into services and experiences. Additionally, a shortage of labor is leading to higher wages. All three of those factors, coupled with supply chain disruptions, are prompting businesses to increase prices.

While labor and supply chain issues may resolve themselves later this year, higher wages may linger as many workers opt for early retirement or leave the workforce for other reasons. TIAA anticipates inflation will rise at a higher rate in 2022 than the pre-pandemic average of 2% growth, though at a slower rate than in 2021, says John Canally, Chief Portfolio Strategist, TIAA Investment Management Group. While there is still a risk of higher inflation, he believes continued Fed intervention, which includes raising interest rates, will help mitigate that risk.

“Act hastily, and you run the risk of overreacting. There’s no silver bullet investment that can offset inflation.”

You may have more inflation protection than you think

Rising inflation can lead to stock market volatility and diminish spending power. To help make sure inflation doesn’t impact your investments, there are some portfolio moves you can consider making today.

For example, you may already own equity investments in your TIAA retirement plan, brokerage or managed accounts that help hedge against inflation. If you own a home, that’s the kind of asset that can often do well during periods of inflation. While not an investable asset, the value of any vacation or rental properties you own often rises with inflation as well. In general, home prices are up between 15% and 20% in the last year.

Equities usually do well in periods of moderate inflation. In fact, stocks tend to perform best when inflation is rising at a rate between 2% and 4%. Certain sections of the stock market are positioned to potentially benefit from higher inflation. For example, banks can borrow money at a low rate and lend at a higher one when inflation is rising. In addition, REITs (real estate investment trusts) can offer the same inflation hedge that owning property can. Real estate firms often benefit from inflation, as they can pass along their higher costs through rent increases.

Some things you might want to avoid

Some investments you may want to limit or avoid when inflation is rising include cash equivalents or CDs. Also, remember that money you hold in a typical bank account is likely losing value as inflation rises at a faster pace.

Investors may want to make adjustments to their financial plan to help protect their portfolio, but beware of making sudden changes in response to inflation, said Canally. It's common for investors to flock to gold when inflation rises, seeing it as a hedge against higher prices. However, in 2021, gold had its worst year since 2015. Canally reminds us that everyone’s situation is different, and there isn’t a one-size-fits-all solution.

Given continued market volatility, speaking with your TIAA advisor can help make sure you have a plan in place that addresses your particular goals.

“It’s important to make sure any changes you’re making fit with your overall plan,” Canally warns. “Act hastily, and you run the risk of over reacting. There’s no silver bullet investment that can perfectly offset inflation, but many strategies can help.”

Your TIAA advisor may point you in the direction of a managed account, which can provide access to a customized, diversified portfolio that may already have inflation protection built in. Managed accounts also provide strategic asset allocation, fund selection and portfolio construction. TIAA will also monitor your account for opportunities to rebalance your account and may perform tax-loss harvesting for taxable accounts.

How should retirees react to inflation?

If you’re nearing retirement, or already retired and living on a fixed income, you may need to review your sources of income. Low interest rates may mean you can’t rely solely on income from bonds to fund your retirement. Dividend yields, the quarterly payments that many companies make to shareholders, are also relatively low.

Even with low yields, retirees should still own bonds, Canally says. Holding bonds can help balance your portfolio against a decline in stock prices and inflation.

You may also need to revisit your savings plan, including considering part-time work. Talk to your TIAA advisor to find out ways to maximize your income in retirement.

Fixed annuities can provide more assured sources of lifetime income. A fixed annuity can provide a reliable income floor to pay for essential expenses and supplement other guaranteed income sources, such as a pension or Social Security. Variable annuities, on the other hand, offer the potential for growth to help investors cope with inflation and rising costs over the length of theirretirement.

Want to learn more?

Your TIAA advisor can review your investments and financial plan with you to help make sure you’re taking all the right steps to minimize the impact of inflation—while helping stay on track to meet your financial goals.

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This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.

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Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.