Noah Damsky, an investment adviser at Marina Wealth Advisors in Los Angeles, is a fan of long-term bonds. “I’m buying as I expect the interest rate curve to flatten once the Fed begins hiking rates as aggressively as the market is pricing in,” he said.
In either case, don’t use them as a complete cash alternative, said Elliot Pepper, a financial planner and director of tax at Northbrook Financial in Baltimore. Even though inflation will eat into the value of your cash, having some dry powder to make moves could help investors take advantage of unexpected opportunities.
“The ability to have that cash to put to work for you, that’s what separates the investment superstars from the people who are just going to ride the market,” Pepper said.
Liz Ann Sonders at Charles Schwab urges caution on an increasingly popular type of bond: TIPS. Short for Treasury inflation-protected securities, they are designed to shield investors from a decline in the purchasing power of their money. That may sound appealing given inflation ticking higher, but their moment may have passed.
“At the early stages of the pickup in inflation we had a more positive outlook on TIPS, but then they became so popular, and that caused the price to go up and the yields to go down,” said Sonders, the firm’s chief investment strategist.
Rethink real estate
Our homes are often our biggest investments. As real assets, properties can often function as solid hedges against inflation. And in most times, real estate values serve as a healthy check against stock-market volatility because property prices swing less than trendy equities.
Still, with the housing market in many countries still red-hot, real estate may be out of reach for average investors. That’s why experts recommend getting some property exposure in a portfolio through real estate investment trusts, or REITs, which focus on different types of properties, ranging from apartments to manufactured homes to warehouses. REITs must pass through 90% of their taxable income to shareholders as dividends in order to avoid paying federal taxes.
Cedric Lachance, director of global research at real-estate research and advisory firm Green Street, has the most confidence in REITs that are “roofs above heads” since the residential component of REITs tends to be a good inflation hedge. REITs that focus on single-family housing, manufactured homes or senior housing are the most attractively priced now, he said.
Since much of a REIT’s payouts to shareholders is taxed at ordinary income rates — rather than the lower, longer-term capital gains rate that applies to the so-called qualified dividends that an investor might get from owning individual stocks — owning REITs in a tax-deferred IRA or a 401(k) often makes sense.
This article was provided by Bloomberg News.