From your local grocery store to the car dealership down the street—the word “inflation” is being tossed around quite as bit lately. Some physicians in small practices may also be feeling the effect when putting their supply budgets together. The cost of things is starting to tick upward.
According to The Balance, the Consumer Price Index (CPI) has grown 5% over the past year, which is the largest 12-month increase since August 2008. Basically, this means that people are paying more for the same goods and services they paid for a year ago. Inflation, as defined by Investopedia, is the decline of a currency’s value thus limiting its purchasing power over time. The result can be a slowdown of the economy as the value of the dollar tries to stabilize itself.
So how does inflation affect your portfolio? Inflation is all about the perceptions of value and how that value is raised to compensate for the resulting increased costs. The same is true for stocks. The good news is that the same tried and true investing best practices are still in play. Here are some tips to keep in mind when investing during times of inflation:
Overpaying for stocks. As some companies increase prices, their revenue increases as well, which will potentially lead to their stock prices increasing. This results in an overvaluation of the stock and possibly overpaying for a stock. Be aware that some rising stock prices are the result of inflation and not a real increase in value over time.
Borrowers beware. Some growth stocks depend on the flow of borrowed money to maintain their cash flow. This can be troublesome when the Federal Reserve responds to inflation by raising interest rates. This is just something to remember if you are heavily investing in small-cap companies or start-ups during a time of rising inflation.
Diversification is still key. If you have a portfolio that includes a range of stock types and asset classes, you should be able to offset some of the investment hits caused by inflation. Most of the time, not all sectors will be affected and although you may lose value in some types of stocks, you may be able to gain in others.
Recovery can sting. Be prepared for a readjustment period. As inflation is tamed with Federal Reserve intervention and economic stability, your portfolio may decrease in value. Don’t panic. Stay the course and consult with a trusted financial advisor to readjust your investments as needed.