This post originally appeared on News@Northeastern. It was published by Tanner Stening.
Inflation rose to a wallet-crushing 9.1% this June compared to one year ago, according to the latest consumer-price index report. This puts even more pressure on the Federal Reserve to curb soaring prices through interest rate hikes, leading to more concerns that the economy could be entering a recession.
Yet the present economic conditions have many experts flummoxed, with data indicators going seemingly haywire (despite soaring inflation, the recent job numbers have been quite strong). The divergent readings have some economists speculating that the economy may be stronger than the doomsayers would have us believe, with others bracing for the long-talked-about slowdown.
But for many Americans, getting ahead financially can be tricky in present conditions. What does all this uncertainty mean for both new and savvy investors?
“If we have a recession, that means there will be a lack of business growth which, coupled with high inflation, means it will be a very tough time for investors,” says Jingjing Chen, a visiting professor of finance at the D'Amore-McKim School of Business.
The housing market
Traditionally, the housing market has proven to be fairly inflation-resistant, Chen says. But the combination of high labor costs and supply chain disruptions affecting raw materials have priced out many home buyers during this time.
“It may not be a good time to buy a home because the prices are so high,” Chen says. “But if you own a home, all of a sudden your rent can become a very good investment.”
Beyond directly investing in real estate, you could invest in so-called real estate investment trusts, or REITS, which are companies that manage real estate assets. Modeled off of mutual funds, REITS can provide steady dividends to small investors just starting out, says Razan Salem, a finance and investment lecturer at Northeastern.
But best options are those that operate commercial real estate, she says.
Diversify your portfolio
Salem says many tried and true investment principles still ring true during inflationary periods, including most importantly: Never put all of your eggs in one basket. Diversifying your portfolio, she says, helps to eliminate loss. Yet 87% of investors don't heed this core principle, she says.
“To succeed as an investor, you need to think about these three things: What are your goals? What is your wealth? And your risk tolerance?” she says.
If you're starting out in investing, Salem says to stay away from individual stocks and focus on index funds instead. An index fund, which is a basket of stocks designed to track a specific market index, such as the S&P500, is itself a diverse instrument that carries low risk—a good option for new investors.
And so are so-called defensive stocks—so named because they tend to do better during recessionary periods and offer modest dividends. These are your R&D-heavy pharmaceutical and biotech companies that don't swing with the business cycle of the economy. Companies in the information-technology sector are less sensitive to inflationary pressures, Salem says, and would also be good individual stock options.
Moving through asset classes, one safe option for investors are so-called treasury inflation-protected securities, which are bonds designed to protect investors' purchasing power by adjusting to rising prices. Backed by the U.S. government, a TIPS offsets inflation by adjusting the value of its principle. Bondholders are paid the adjusted principal or original principal when a TIPS matures—whichever offers a greater return.
“During this period of high prices, you have to include products in your portfolio that are hedged against inflation,” Salem says.
If you're a new investor, Salem advises against high-risk investments, such as cryptocurrency. Cryptocurrencies have been shown to be incredibly volatile and generate “herd mentality” among groups of investors. Experts also question whether cryptocurrencies have so-called “intrinsic value,” which those in the digital currency space have pushed back against.
Either way, cryptocurrencies are inherently risky for first-time investors.
“For me, I want to invest in something that has real value,” Salem says. “If you're new to the market, don't invest in cryptocurrency now.”
Before investing in any company or product, Salem says it's important to make sure that doing so won't affect your current income and spending. And always make sure to have an emergency fund.
“Keep cash for any emergency,” Salem says. “Whatever's left is good to start investing with. Start small. If you set your goals and your risk-tolerance, you can begin building your own portfolio in a way that suits your circumstances.”