Investing for Growth and Income During Inflationary Times

Inflations Myths Promote Crypto, Gold and Real Estate – Instead Choose Wisely Among High-Dividend Stocks, Bonds and Bond-Like Instruments to Hedge Inflation

It would be an understatement to characterize the year as being unkind to investors. In just six months, the broader markets headed south — with all major U.S. indexes having touched bear market territory — and inflation and key interest rates headed north. Each issue alone is sure to rattle anyone’s resolve. Taken together, it is a gut-punch to investors close to retirement.

On June 15, the Federal Reserve Board hiked rates by 75 basis points — the largest increase since 1994 — representing the third increase in recent months in an attempt to cool inflation. The Fed has suggested there is more to come if inflation continues.

Investors should be mindful of sticking to their retirement plans — which also means making the right adjustments to reflect any upcoming life changes. There are safer havens in tumultuous times, just not the ones that usually come to mind. These more secure assets, including bonds and specific stocks, have a proven track record of generating income and growth, especially in inflationary times.

Myth Busting

The traditional assets that investors were taught to seek in an inflationary environment are no longer foolproof. Gold, long considered the asset of choice when the U.S. dollar is in decline, has lost its luster. The gold standard is now a relic investment philosophy and it’s inappropriate for anyone retired or nearing retirement because it doesn’t generate income.

Real estate, long considered a shelter for investors in periods of inflation, is just as impractical to hold in a portfolio as gold. Sure, real estate prices tend to rise with inflation, but most people don’t have the financial resources to diversify their holdings by owning multiple properties across the country. And real estate is not a liquid asset. Finding a buyer, especially when stock markets are volatile, can be difficult.

Virtual currencies were once heralded as the next digital “gold,” but today’s headlines prove that asset class is just as risky, and volatile, as equities. Crypto exchanges, banks and start-ups are imploding as once sky-high valuations are crashing.

Stocks and Bonds

Not all stocks are taking a beating. Those tied to companies that share profits with investors — high-dividend stocks — are weathering the storm. Some high-dividend portfolios are yielding more than 4% for the year.

Bonds and bond-like instruments are also outperforming broader markets, contradicting the common belief of avoiding those assets when interest rates rise. Sure, bonds and bond-like instruments are down for the year, but the losses — depending on maturity rates and credits — are lower than the stock market.

Inflation Hedges

Income-generating assets can provide a hedge against inflation. Reinvest payouts from high-dividend stocks to buy more shares, which could be at a discount in an inflationary environment. Interest generated from bonds or bond-like instruments can be used to buy even more of those assets. Investors can generate more income through this strategy than investing in traditional equities because future income can grow faster.

Remember to review retirement timelines. The traditional model has investors starting in growth-oriented assets then switching to income when approaching retirement. The problem is many investors get too close to retirement before reallocating investments The transition period should be 10 to 15 years before retirement. Investors don’t need to abandon growth in the portfolio, but they should be mindful to include an income component.

There are investment options that can generate income and growth during a time of market turmoil, you just have to look beyond traditional assets. High-dividend stocks, bonds and bond-like instruments may seem counterintuitive during inflationary times, but they pay off eventually and they also become more attractive when inflation stabilizes.

Dave Scranton is Founder and CEO of Sound Income Group, a diversified financial services company that operates Sound Income Strategies, the Retirement Income Store and Advisors’ Academy.