Protect your portfolio from inflation

It’s easy to see—and feel—the effects of inflation when you’re at the grocery store or at the gas pump. Inflation affects more than how much you have to pay when running your weekly errands, though. It also impacts how much you need to save for your retirement.

Inflation is the rising cost of goods and services, and it can eat away at your purchasing power over time. To help make sure your money will go as far in retirement as it does today, you’ll need to factor inflation into your retirement savings strategy.

Understanding inflation risk

Investing involves different types of risk. One type is inflation risk—the risk that the return of your investments won’t keep up with increases in the prices of goods and services.

Over time, inflation can erode the purchasing power of certain investments like bonds, because they have a fixed rate of return. For example, let’s say you purchased a treasury bill, which matures in one year, with a yield of 5%. Assuming the average inflation rate of 2% for that year, the real return of your bill would be 3%. In other words, inflation has reduced your purchasing power.

Protecting your portfolio

Inflation can affect asset classes differently, so it’s important to keep your investment portfolio well-diversified to help balance inflation with other investment risks. For instance, you may want to consider investment types that have historically outpaced inflation. Let’s take a closer look at some of these potential inflation fighters, but keep in mind that these investments may carry greater risk.

Equities: Investing in equities, or stocks, may be an effective way to help fight inflation over the long term. Keep in mind, however, that stocks may not offer much protection against short-term changes in inflation, as measured by the Consumer Price Index, or CPI. (The CPI measures changes in the price of consumer goods and services purchased by households.)
Commercial real estate: When inflation increases, commercial real estate tends to respond by increasing rents for both office and retail spaces. That makes investing in commercial real estate a potential way to outpace inflation.
Treasury inflation-protected securities: Just like conventional bonds, treasury inflation-protected securities (TIPS) are issued by the U.S. Treasury and are backed by the full faith and credit of the U.S. government. The difference is that TIPS are designed to track changes in the monthly CPI. Even though the interest rate of a TIP security is fixed, its principal (or face value) increases if the CPI rises—generating a higher return.

Alternatively, you may want to consider the ready-mixed Birth Date Funds in Tier 1, which may include investments in these potential inflation fighters. These ready-mixed portfolios automatically adjust their investment allocations to become more conservative over time, simplifying the investment process by allowing you to invest in one fund that can span your entire investment horizon. They are subject to the volatility of the financial markets, including that of equity and fixed income investments in the U.S. and abroad and may be subject to risks associated with investing in high yield, small cap and foreign securities. Principal invested is not guaranteed at any time, including at or after the funds’ target dates.

And remember, although you can invest in options from any or all tiers of the Hewlett Packard Enterprise 401(k) Plan fund lineup, you may want to focus your investments in Tier 1, or in Tiers 2 and 3, before expanding to Tiers 4 and 5.

Considerations for your investment mix

As you determine the right mix of investments for your current situation, carefully consider your life stage, your retirement and other financial goals, and your risk tolerance.

For investors under age 55, it’s critical to build a portfolio that seeks to provide the long-term growth necessary to fund two or more decades of retirement—while also protecting purchasing power. So, if you’re younger and just starting to save for retirement, you may choose to take some risks and be a bit more aggressive. For investors over age 55, it’s important to begin shifting investment focus from growth to capital preservation, while still factoring in rising costs. So, as you near retirement, you may want to be a bit more conservative with your investments.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry.

Interest rate increases can cause the price of a debt security to decrease. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.

Review the impacts of inflation

Understanding inflation risk can help you build an investment strategy designed for long-term growth and purchasing power.