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Experts Share How to Invest, Benefit From Inflation


  • The Fed raised rates by another 75 basis points, taking the federal funds rate above 2.5%.
  • The consumer price index in August rose 8.3% year-on-year.
  • Bonds, CDs and dividend-paying stocks are good portfolio adjustments, according to three investment experts.

It is no longer news that the economy is entering a phase of slow growth and upswing.

On Wednesday, the Federal Open Market Committee raised rates by another 0.75 basis point, taking the overall rate above 2.5%. The new projected federal funds rate for 2023 and 2024 is now 4.4%.

Meanwhile, the consumer price index, which measures changes in overtime prices for goods and services, rose 8.3% in August from a year earlier.

In a panel discussion hosted by Investopedia on Tuesday, Morningstar’s personal finance director Kristin Benz noted that most fund managers have not seen these economic conditions in their careers.

She added that the closest period to such an environment was the 1970s, when high inflation was accompanied by rising interest rates, causing stocks and bonds to fall at the same time.

In response, investors tend to make a big mistake when trying to adjust their portfolios to a downturn: They focus on what has been a good recent performance, said John Rekenthaler, vice president of research at Morningstar.

“In April, May, June, quite a few people wrote to me talking about commodities, commodity funds, [and] Should I have more commodities in my portfolio? “Rekenthaler said.

He continued: “At least in that case, there must have been an element of bolting the barn after the animals were out, because I checked and the commodity index was down 15% since mid-June, if anyone in mid-June Get in there to prevent inflation from rising and maybe even sell assets that are already losing money.”

Benz points out that a wealth of data from Morningstar shows that investors often undermine their own investing success by chasing stocks that have performed well recently.

The best thing to do, Rekenthaler points out, is to look at what you already have in your portfolio and move on to those that have been beaten the most. One example could be high-yield bonds, he added.

Benz acknowledged that bonds provided a good buffer to offset stock losses during previous bear markets. This time around, the fixed-income portion of investors’ portfolios worries them, she admits.

However, Anastasia Amoroso, managing director and chief investment strategist at iCapita, said there are other options.She specifically pointed out One to three month period Yields on certificates of deposit (CDs) have not been seen since 2005. Additionally, U.S. Treasuries yield 4% with maturities of one to three years. She points out that you can get an 8.5% yield within the risk-increased credit risk spectrum.

“By the way, when the yield is above 8%, the old saying you should buy this because once yields come down and spreads compress, it ends up being a pretty good return for high-yield investors,” Amoroso Say.

In equities, Amoroso said, those who have been investing since 2009 have become accustomed to a zero-interest rate policy. Since then, the phrase “buy the dip” about growth stocks has become a popular playbook. Now, it’s hard for investors to rethink that approach, she added. What worked well in a zero-interest rate policy environment may not work in the future, she added.

As interest rates continue to rise, investors need to be sharper when it comes to buying the dip. Looking ahead, not every growth stock is worth buying, Amoroso added.

“We’re not in an environment where stocks without yields can perform well, but stocks with stable cash flow yields or solid business models and priced accordingly,” Amoroso said.

One of the things that surprises her is that ETF traffic has been positive. She specifically pointed to stocks tied to dividend-paying stocks, such as the iShares Select Dividend ETF, which provides exposure to large-cap U.S. companies with a consistent history of paying dividends.Morningstar’s rating ETF is four stars. Its trailing 12-month yield is 3.02%.



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