QUESTION: It worries me that Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell now say the current inflation run isn’t really “transitory.” What can I do to keep inflation from chewing away at my investments?

ANSWER: Inflation can be a triple whammy for investors because:

  • The dollar in your pocket will buy less a year from now. To put it another way, inflation erodes the value of all your dollar-denominated assets. It will hit cash and fixed income the hardest as these assets cannot appreciate to compensate for the erosion.
  • Interest rates will rise. Rising rates reduce the value of assets with a future payout. It hits high-growth stocks and long-term bonds hardest as most of their cash return is in the distant future.
  • Corporate bottom lines will be impacted. Rising prices of materials combined with higher interest rates can pressure corporate margins and slow earnings growth.

So how do you avoid getting whammied?

First and foremost, be nimble. It’s been 30 years since U.S. investors have seen back-to-back years of 3% or higher inflation. Similarly, no one has experienced a rising interest-rate environment since the mid-1990s. What worked then might not work now, so be ready to switch strategies. Here are some possible hedges against inflation:

Invest in hard, cash-flowing assets like real estate and energy. These assets may provide higher cash-flow (returns sooner) and often cash payments adjust with inflation.

Shift to more value-oriented stocks. A bigger portion of their value is based on current cash flow, compared to growth stocks that are betting on higher cash return in the future.

Hold assets not denominated in dollars. If the dollar is falling in value, assets priced in other currencies should be appreciating. Focusing on the underlying asset’s value is critical to making this strategy work.

Many clients often ask about:

Investing in gold and precious metals? This traditional hedge against inflation can work but has several drawbacks. Metals are hard assets, but they are not productive and won’t produce something or pay a dividend. Prices can be volatile. In other words, it’s a strategy that can be used sparingly, but it’s not a magic wand.

Bitcoin? AMG’s research into cryptocurrency and its price movements indicate it’s a purely speculative asset that is highly correlated to market movements. Like gold, it is a non-productive asset, but unlike gold, it has no history of being an inflation hedge and is far more volatile. AMG does not see any reason to believe that crypto would provide any significant hedge against inflation, and there is evidence to suggest it might do very poorly if market sentiment sours.

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