The best part of the market you should look at are dividend players: Portfolio manager
As Bay Street debates whether or not inflation is a real threat to the economy, the verdict is already in for anyone having to pay eye-popping prices for groceries, fill their gas tanks, or heat their homes.
It’s a strain on household budgets right now and prolonged inflation could be devastating for those approaching, or in, retirement.
FIRST THE GOOD NEWS
It’s not clear whether the current inflation surge will last. It could be temporary as supply catches up with demand in the aftermath of lockdowns triggered by the global pandemic and as supply chains return to normal.
If prices do not return to normal levels - as they did with lumber - the Bank of Canada has several tools available to cool the economy such as gradual interest rate increases. Governments also have policy levers to take some heat out of the economy. Individual banks can even play a part in lowering the temperature on red-hot housing markets by clamping down on mortgage lending.
None of that really matters for retirees with defined benefit (DB) pensions, where benefits are consistent and increases are tied to inflation.
More Canadians will also get the same inflation protection from Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.
NOW THE BAD NEWS
CPP and OAS benefits are not enough for most Canadians to survive on, and the number of Canadians with defined benefit pensions have been dwindling since the 1980s.
Workplace pensions have been declining overall and a growing number of those remaining are defined contribution (DC) pensions. A typical DC pension matches employee contributions with employer contributions. Those contributions are invested in the broader markets through a third party and eventually become the plan holder’s responsibility.
DC pensions are only as successful as the investments inside them, and even successful investments can be eroded by inflation.
The same unfortunate rule applies to retirement investments in registered retirement savings plans (RRSP) and tax-free savings accounts (TFSA). If you need your portfolio to grow by an annual average rate of five per cent and inflation is four per cent, for example, you will need to generate returns of nine per cent - and that requires added risk.
HOW TO INFLATION-PROOF YOUR PORTFOLIO
There are complicated investments or products designed to limit the impact of inflation such as private real estate, inflation-adjusted bonds or annuities that can ensure inflation adjusted returns. Whether the extra security is worth the added costs depends on the individual. A qualified financial adviser can be a big help but make sure fees don’t outstrip their usefulness.
For the average investor, the best hedge against inflation; arguably the best hedge against any form of volatility, is diversification.
Portfolio diversification generally means a mix of equity market sectors and geographic regions to spread out risk while remaining exposed to opportunity wherever it may come from.
Broader equity markets usually advance with inflation, but some equities actually contribute more to - and benefit mor dale jackson e from - inflation. Commodities like crude oil, natural gas, grain and metals have taken the lead. That means bigger profits for commodity producers.
You can invest in specific commodities on the futures market through exchange-traded funds (ETFs), or purchase shares in commodity-producing companies directly, or through ETFs and mutual funds.
Real estate is another equity asset class already contributing to - and benefitting from - inflation. Home owners are reaping rewards from soaring residential real estate prices; there are many ways to diversify real estate holdings into other real estate subsectors through real estate investment trusts. REITs are companies that own and operate residential, commercial and industrial real estate and generate income from rents and capital gains through price appreciation.
Proper portfolio diversification also includes safe fixed income. Dedicating a significant portion to fixed income in a portfolio will cushion it from volatility on the equity side. How much of your portfolio should be allocated to fixed income depends on your tolerance for risk and how soon you need the cash.
It’s hard to make that argument right now when yields are at rock-bottom lows, so it’s best to ladder your fixed income in short-term maturities to permit frequent opportunities to take advantage of higher yields if inflation eventually pushes interest rates up