For past few years, we have lived in a very low inflation environment, and not only have we enjoyed the benefits of low inflation, but we have grown accustomed to it as well.  Then when inflation surged, it was an unwelcome shock to our systems and our wallets.

In December we saw inflation shoot up to 7% and it didn’t stop there. We are now in the middle of March and prices are still on the rise. At this point, inflation is the highest it has been in decades. Prices are up, supply is down, what do we do now? First and most importantly, if you haven’t done so, it is time to sit down and take a serious look at your portfolio. Re-asses your goals and objectives and check if you are on track, or if changes need to be made. Certain assets do better than others in high inflation periods, so some adjustments may be necessary.

An asset that we love in this crazy environment are I Bonds. These pay a combination of a fixed rate that stays the same for the life of the bond and an inflation rate that is set twice a year. Currently I Bonds are paying a combined rate of 7.12%. These bonds are inflation adjusted, so the rate is set accordingly. If you do decide to purchase, I Bonds, they must be purchased through the Treasury and there is a $10k maximum limit per person, per year. Also note that these bonds can be redeemed after one year. But if redeemed before five years, you will lose the previous three months of interest. They are penalty free after 5 years. There are additional tax and suitability features to consider when investing in bonds.

Another option to consider would be municipal bonds. If you are going to have the consequences of high inflation, you might as well have some tax benefits. With municipal bonds you can add to your portfolio while avoiding State and Federal taxes. For taxpayers that are in a higher tax bracket, this is great option. Of course, it is always wise to remember that as inflation rises, bond prices decrease. However, as we see rates start to stabilize, these will become even more attractive.

Of course, you probably don’t want to tie all your money up in bonds and fixed income, and you don’t need to. There are other options. Like I mentioned before, during periods of high inflation, some asset classes perform better than others. According to a Wells Fargo study, top performers during an inflationary period included natural resources, followed by emerging markets, gold, and cyclical stocks. Also, just like any portfolio, for clients that prefer ESG (environmental, social, governance) investing, an ESG portfolio can be accommodated during high inflation.

These past few months have been uncomfortable for investors, but we don’t expect this incredibly high inflation to last forever. Forecasters are predicting the supply chain problems will ease and inflation will decrease over 2022. In the meantime, try not to panic.  Look at your portfolios and maybe some small adjustments can be made and as always, that is why we are here. We encourage our clients to reach out with any questions or concerns they may have, after all, we are your financial advisors.

 

https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm