Are rising prices and inflation going to hurt your investments? Here’s how to protect your nest egg.

·4 min read

Americans are paying more for everything from rental cars to hotels this spring because of pent-up demand for travel, which has been juiced by extra cash from stimulus checks.

But rising inflation won’t just weigh on your travel budget or your shopping bills. It could also affect your investments.

So what about your 401(k) and mutual funds? What should you be thinking about if prices keep rising?

While inflation eats away at the purchasing power of the dollar and decreases Americans' ability to pay for goods, there are ways for investors to protect themselves, according to Ryan Detrick, chief market strategist at LPL Financial.

'I really had sticker shock': Will a reopening economy mean surging prices for Americans

No more driving distractions:High-tech windshields could change the way we drive

“If you are worried about inflation, (then) commodities, real estate, value stocks, TIPS (Treasury Inflation-Protected Securities) and bank loans all could be nice places to get some protection from the dreaded i-word,” Detrick said in a note.

Just a blip? Or higher prices ahead?

The Federal Reserve is keeping a close eye on rising prices after a surge in inflation last month ignited a debate over whether price increases will fade, or pick up steam and possibly lead to an overheating economy.

On Friday, Wall Street turned its attention to a key measure for inflation, April's Personal Consumption Expenditures index, or PCE, which rose 3.1% from a year earlier (excluding volatile components like food and energy). When making policy decisions, the Fed's preferred measure of inflation is the PCE data instead of the more widely known consumer price index, or CPI.

A longer bout of rising inflation could force the central bank to hike interest rates sooner than expected, which would push up borrowing costs for consumer loans like mortgages.

That’s spooked some Americans who wonder whether this is just a blip, or a return to the hyperinflation economy of the 1970s. Most economists, however, don’t expect spiraling inflation.

Why? Because many of the forces that have kept a lid on inflation for more than a decade remain in place, including tech innovation, globalization and increased productivity.

“Moderate inflation isn’t a big deal,” says Adam Lampe, CEO and co-founder at Mint Wealth Management, an investment advisory firm. “Keep in mind that if inflation does exceed expectations, the Fed has opportunities to control and manage it.

"We’re not going back to the hyperinflation period of the 1970s. We’re in a much more global world now.”

Many economists have argued that the leap in prices is a byproduct of a reopening economy and should abate by next year.

Still worried? Here's what you can do

If you’re fearful this bout of inflation will stick around longer than expected, there are ways to protect your nest egg.

Investments in real estate, commodities and gold can help offset higher inflation, wealth manager say.

Real estate, for instance, can gain value amid inflation, while property owners can increase rent on tenants. Real estate investment trusts have also offered attractive returns in prior periods of rising inflation.

Commodities historically do well when the U.S. dollar is weak, and higher inflation tends to push the greenback lower.

“Inflation is inevitable, especially with the amount of money the government is spending,” says Patrick Healey, founder and president of Caliber Financial Partners, a financial planning firm. “From a financial standpoint, you do need to have some hedges in your portfolio.”

If you want to beat inflation over the long run, stick with stocks, Detrick says.

Since 1950, the average annual inflation rate based on the consumer price index has been 3.5%, while the S&P 500 has returned more than 9% annually, according to LPL Financial.

If you want to be more targeted, value stocks tend to benefit from higher inflation, experts say. Materials and energy companies stand to benefit from higher commodities prices, while higher interest rates tend to help financial stocks with higher profit margins.

What about cryptos to hedge inflation?

As for other alternative assets, some wealth managers prefer gold as a hedge against inflation over cryptocurrencies like bitcoins, which suffered another swoon recently.

Since 2010, the S&P 500 has tallied 10 trading days with declines of 5% or more while gold has suffered one such hit, according to Glenmede, an asset management firm. Bitcoin has notched 455 trading days of 5% moves in either direction in the past 11 years.

In the past two bear markets, Bitcoin fell just as much as the S&P 500, if not twice as much. So just when investors needed it to protect their portfolios most in a downturn, it failed in that regard, says Michael Reynolds, vice president of investment strategy at Glenmede.

"We're not on the crypto bandwagon just yet," Reynolds says. "There's so much speculative activity in that corner of the market. It's not something we're comfortable with."

This article originally appeared on USA TODAY: Stock market hit by inflation: How rising prices affect investments

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting