Long-Term Rates Will Edge Higher

When the Federal Reserve signaled in June that it expects to raise short-term interest rates by the end of 2023—sooner than an earlier forecast—the response was immediate and fierce. The Dow Jones industrial average dropped more than 800 points, and the price of the 10-year Treasury note also dropped, increasing the yield to nearly 1.6%. Rates on 30-year mortgages rose above 3% for the first time since April.

The backdrop to all this worrisome news was rising inflation, which prompted some to recall the dark days of the early 1980s, when the Fed raised interest rates sharply to curb it. Back then, home buyers were lucky to lock in a 30-year mortgage for less than 12%.

But something strange has happened in the weeks since the Fed announcement: 10-year Treasury note yields have fallen back, and with them, rates for 30-year mortgages. As of July 15, the average rate for a 30-year mortgage was 2.88%.

Economists attribute the lull in mortgage rates to several factors, ranging from worries about whether the rise in the COVID-19 Delta variant could curb economic growth to a growing consensus that the inflation spike is a short-term phenomenon. “Investors are buying into the idea that a lot of the very strong inflation figures are due to transitory factors,” such as slowdowns in supply deliveries, says Matthew Speakman, an economist for real estate website Zillow.

Still, interest rates will eventually head higher (although nowhere near what we saw in the 1980s). Kiplinger is forecasting that the 10-year Treasury will rise to 1.8% by the end of 2021 and 2.3% by the end of 2022. The average rate for a 30-year mortgage is expected to rise to 3.3% by the end of 2021 and move up to 3.8% by the end of 2022.

That means home buyers, who are dealing with limited supply, probably don’t need to scramble to lock in a rate (see How to Win in a Red-Hot Housing Market).

Short-term interest rates, which determine rates on credit cards and home-equity lines of credit, are expected to remain near zero through 2022. That’s good news for borrowers—assuming they can get a loan. Several major banks, including Wells Fargo, JPMorgan Chase and Citibank, halted new home-equity lines of credit during the pandemic and have yet to resume their offerings.

Credit card issuers, on the other hand, are eager to sign up customers, particularly since many borrowers used their stimulus checks or savings on canceled vacations to pay off balances during the pandemic. Credit card rates are still much higher than rates on other loans—the average rate is about 16%—but many issuers are looking to entice new customers by expanding their rewards programs (see New Perks From Our Best Rewards Cards).

No relief for savers. Meanwhile, the only good news for savers is that rates on savings accounts, certificates of deposit and other safe parking places probably won’t fall any more, says Ken Tumin, founder of DepositAccounts.com. The average rate for bank online savings accounts is about 0.45%, and major brick-and-mortar banks are paying even less than that. Locking up your money in a CD won’t boost your yield: The average rate for a one-year CD is just 0.17%, and you’ll get only 0.31% on a five-year CD, according to Bankrate.com.

It’s not just interest rates that are keeping yields low, Tumin says. The personal savings rate soared during the pandemic as consumers lowered their spending and banked their stimulus checks for a rainy day. In the first quarter of 2021, bank loans accounted for only about 58% of deposits, says Tumin, down from 69.5% in 2020. That indicates banks have plenty of money to lend and will be in no hurry to raise rates to attract more deposits, even after the Fed hikes short-term rates.

There are steps you can take to earn a higher return on money you can’t afford to lose. Some high-yield rewards savings accounts offered by local banks and credit unions offer rates as high as 5%. The trade-off is that they typically cap the amount of deposits eligible for the high rate and require you to meet certain criteria, such as using the institution’s debit or credit card a certain number of times each month, having your paycheck direct deposited, and conducting all of your business online. For example, Consumers Credit Union (Illinois) pays 4.09% on up to $10,000 if you spend at least $1,000 a month on one of its credit cards, have direct deposit and meet other requirements.

Another option for money you don’t expect to need right away is a Series I savings bond. The composite rate on Series I bonds issued through October is 3.54%. The rate consists of a fixed rate—currently 0% on new bonds—and an inflation rate, which is based on the government’s consumer price index and adjusts every six months from the bond’s issue date (see Earn 3.54% With Series I Bonds).

A big raise for seniors

Inflation can be particularly tough on retirees who are living on a fixed income, but the recent price spikes have an upside. The Kiplinger Letter is forecasting that the annual cost-of-living adjustment for Social Security benefits for 2022 will be 6.3%, the biggest jump since 1982, when benefits rose 7.4%.

The projected increase reflects the rebound of consumer prices that were depressed during the pandemic. COLAs are calculated using the consumer price index for urban wage earners and clerical workers.

Source: kiplinger.com

Are You Itching for an Earlier-Than-Expected Retirement?

If you’re like many people, the pandemic has had a profound impact on your worldview. The tragedy and social isolation we’ve experienced have put into sharp focus what’s most important. It’s no surprise, then, that a survey conducted by Ameriprise Financial in January found that 70% of people said the pandemic has increased their desire to enjoy life.

And this desire to live life to the fullest is leading people to accelerate their retirement plans. In fact, nearly one in five (18%) of those surveyed who had a retirement date said they are speeding up their plans to exit the workforce. In most cases, it wasn’t because they were pushed out of jobs or couldn’t find work during the pandemic. In fact, 83% said the decision to retire earlier than anticipated was their choice.

If you’re fortunate to be in the position to accelerate your plans for retirement, you may be looking forward to an exciting new chapter in life when you have more time to do the things you enjoy most. After more than a year of social distancing, perhaps you’re looking forward to traveling and reuniting with friends and family. Unburdened by the demands of work, you may finally have time to tackle projects around the house or pursue your passion for activities like writing, volunteering and exercising.

Whatever your dream retirement looks like, it’s critical you have a plan to pay for it. Before you walk away from your career and the paychecks that come with it, be sure you’ve thought through these fundamental questions about your future spending needs and available sources of income.


As a first step, try to estimate what your living costs will look like in retirement by considering the following:

What will your typical monthly expenses be?

Some people assume, often mistakenly, that living costs will be lower in retirement. They often overlook things, such as hobbies and experiences, that can bring fulfillment to your days as a retiree but also come with a price. To avoid this miscalculation, add up your current monthly expenses today (rent or mortgage, utilities, food, transportation, other necessities, taxes and discretionary spending, such as travel) and determine what those expenses will look like when retirement begins.

Some costs – like commuting – may go down, while others – like dining out – may increase.

What new expenses might be added when you have more free time?

You may be planning extensive travel or a major purchase (i.e., vacation home or recreational vehicle). These could add to your retirement expenses.

How will you pay for medical insurance?

If you are leaving an employer, your health care costs could become a bigger factor, particularly if you’re younger than 65 and aren’t yet eligible for Medicare. Longer term, you may need to budget for Medicare’s monthly premiums and out-of-pocket expenses.

Sources of income

It’s no secret that you need enough money from various sources to meet expenses over the course of your retirement, especially one that could last decades, given today’s life expectancies. If you’re planning to start your retirement earlier than expected, it’s especially important to determine whether your funds will last.

The following questions can help you determine whether your nest egg can sufficiently cover your planned retirement:

Where are your retirement savings invested, what have you accumulated, and what is your withdrawal strategy?

Inventory all of your accounts, including any “orphaned” retirement plans that still reside with previous employers. IRAs and other accounts held at various asset management firms should also be documented and potentially consolidated to simplify the process of taking distributions. Be realistic about how much you can afford to withdraw and not run out of money (no more than 4% of your savings each year is a general rule of thumb to consider).

If you’re unsure of how much you will need, working with a financial adviser can help you to determine how much to withdraw, which accounts to take money from, and when and how to do so to potentially minimize taxes.

When will you begin collecting Social Security?

The earlier you begin, the lower your monthly benefit will be compared to its value if you wait until you reach your full retirement age, which depends on your date of birth. The benefit is reduced for each month before full retirement age. 

As an example, if someone turns 62 (the earliest age for qualification) this year and starts collecting Social Security, their benefit would be about 30% lower than it would be at their full retirement age, which in this case would be 66 years and 10 months.

On the other end of the spectrum, if you delay receiving Social Security benefits until after your full retirement age, your monthly benefit continues to increase until you reach 70. For instance, if the same person from the previous example turns 62 this year and holds off on collecting Social Security benefits until reaching age 70, their full retirement benefit would be a little over 25% larger than the amount they’d receive at their full retirement age. However, waiting may not be the right choice for everyone.

A financial adviser can help you determine an approach that reflects your options and your personal situation.

Decisions you make today have long-term consequences

Starting off on the right foot in retirement, no matter the timing, is critical to your long-term financial security and quality of life. Don’t be hasty in finalizing your decision to retire or choosing to tap retirement income sources like Social Security. Answering these fundamental questions can help you assess whether you have a plan that will support your retirement lifestyle — not just for the initial years of retirement, but also for the long run.

Ameriprise Financial Inc. does not offer tax or legal advice. Consult with a tax adviser or attorney. Investment advisory products and services are made available through Ameriprise Financial Services, LLC, a registered investment adviser. Ameriprise Financial Services, LLC. Member FINRA and SIPC.

Senior Vice President, Financial Advice Strategy and Marketing, Ameriprise Financial

Marcy Keckler is the Senior Vice President, Financial Advice Strategy and Marketing at Ameriprise Financial. She also oversees the Confident Retirement program. Marcy has been with Ameriprise Financial (formerly American Express Financial Advisors) for 21 years in a variety of positions in financial planning, marketing and interactive development.

Source: kiplinger.com

Readers Find Some Weird Winners

Bond rates are plunging, banks pay next to nothing, and stocks are so rich that the S&P 500 Index yields a paltry 1.4%.

My mailbox is thus brimming with queries about offbeat, high-distribution investments. Many are leveraged funds, rely on options and futures trading, or extend high-rate loans to less-creditworthy borrowers. Some augment regular income payments with periodic returns of capital.

That is tolerable when a fund manufactures enough trading profits or capital gains to cover these emoluments. But returned capital does not count as “yield” and is not a dividend. (It does postpone a possible capital gains tax bill.)

Which of this high-test stuff is safe and timely?

Generally, I am all-in on striving for extra yield, evidenced by the strong multiyear returns in high-yield corporate and municipal bonds, preferred stocks, most leveraged closed-end bond and income funds, and pipeline and infrastructure partnerships. These are all straightforward and understandable.

But the income marketplace is also full of gadgets and thingamajigs, so when Richard writes in to extol Credit Suisse X-Links Silver Shares Covered Call ETN (SLVO), or Steve asserts that Guggenheim Strategic Opportunities Fund (GOF) “seems too good to be true,” or Thomas wonders how I have overlooked Cornerstone Strategic Value Fund (CLM) when it “pays a monthly dividend” at an annual rate of 16.2%, I need to evaluate each idea individually. Most of the time, I find flaws, such as high fees or madcap trading. But sometimes oddities have their day – or days – of glory.

Triple Play

Of late, this reader-chosen trifecta is successful, even stunningly so.

SLVO, which is linked to a silver index and sells covered call options on that index for income, has a one-year return of 24.6%. Because silver is rampaging, the value of the call options SLVO sells is way up, and so it has issued monthly distributions of 11 cents to 20 cents so far in 2021. That’s a pace above 20% annualized, based on the July 9 closing price of $6. But I would never count on anything linked to gold or silver for essential income.

Guggenheim Strategic, a leveraged junk-bond fund, has a one-year return of 43.0% and pays $2.19 annually on a $22 share price. About 60% of that is returned capital, but there is enough actual income to yield 3.9%. Cornerstone Strategic, which owns stocks ranging from Amazon.com (AMZN) and Apple (AAPL) to small-company shares, as well as some closed-end funds, has a 33.9% one-year total return, mostly capital gains. The income layer of its fixed monthly distribution is only 1.6%. Thomas, the rest of your cash inflows are returned capital or trading gains.  

Guggenheim and Cornerstone, like so many closed-ends, owe much of their good fortune to the ascension of their share price to a high premium over the value of their underlying assets. Neither fund has a great long-term performance record, but kudos to readers who sussed out these or similar opportunities a year ago, when premiums were small or shares traded at a discount. There is a reasonable argument that it is wiser to pick up a mediocre CEF at a cheap price than a good fund that trades at a premium.

Not every unusual income fund is a winner. Another reader named Richard bragged on IVOL, the Quadratic Interest Rate Volatility and Inflation Hedge ETF. Rates are volatile and inflation hedges are in vogue, so this fund sounds exactly right. But its fortunes depend on the use of derivatives to profit from market stress. That is hard to sustain. After a strong debut in 2020, IVOL has a total return of 1.1% for 2021 through July 9 and has lost 3% in the past two months. It might be too much of a contraption to work over time.

Source: kiplinger.com

How to Play the High-Yield Rally

High-yield bonds have been on a roll. Over the past 12 months, funds that invest in junk-rated debt – credit rated double-B to triple-C – have gained 14%, on average, more than any other bond-fund category. As a result, investors have poured more money into high-yield bond funds in the first half of 2021 than in all of 2020.

That might make you wary. But investors with a long-term view should consider Metropolitan West High Yield Bond (MWHYX). The fund’s managers run it with a full market cycle in mind. They’re conservative, they like a bargain, and they let bond prices and the difference between yields in junk bonds and Treasuries – known as the spread – influence when to dial up or pull back on risk.

When prices are low and spreads are high, the managers take on more risk. When the opposite is true, they reduce risk.

“We try to insulate the fund from downdrafts by being more conservative” when prices are high, says co-manager Laird Landmann. Over the long haul, this approach has delivered above-average returns with below-average volatility.

These days the percentage of junk bonds that trade cheaply (below 90 cents on the dollar) is less than 1.5%, the lowest it has been over the past 20 years. Current spreads between junk bonds and Treasuries, about three percentage points, are near decade lows, too.

Time for Caution

That has the fund managers on the defensive. Bank loans now make up about 18% of the fund’s assets – a “max positioning” for the fund, says co-manager Jerry Cudzil. These securities have seniority in the capital structure – they get paid first – and interest rates that adjust in line with a short-term benchmark.

The managers have also shifted into more defensive industries, such as cable, food and beverage, and managed health care. “Today, you’re not being compensated to take on more risk,” says Cudzil. “These sectors will experience less volatility from an earnings perspective.”

The fund’s 8.3% three-year annualized return ranks among the top 8% of all high-yield bond funds. It was one-third less volatile than its peers over that stretch, too.

chart of high-yield bond funds, including Metropolitan West High Yield Bondchart of high-yield bond funds, including Metropolitan West High Yield Bond

Source: kiplinger.com

How Patients with Lasting Symptoms of COVID Can Apply for Disability

COVID survivors who are unable to work because of lasting effects from the virus should consider applying for disability benefits, though this can be a difficult road, says Barbara Comerford, founder of the Law Offices of Barbara B. Comerford in Paramus, N.J.

Social Security disability insurance is one option. To qualify for it, generally you must have earned 40 credits during your working years, 20 in the last decade before you became disabled, though younger workers may qualify with fewer credits. In 2021, workers earn one credit for every $1,470 in wages, or a maximum of four credits after $5,880.

You must also meet the definition of disabled. That means you are unable to continue working at your job, you can’t switch to a different position because of your condition, and the disability is expected to last for at least a year. Comerford, who has represented clients that have applied for disability because of long COVID, says the Social Security Administration has been more willing to pay out benefits, especially for older workers who are close to full retirement age.

To determine your disability payment, Social Security uses a formula similar to the one for calculating retirement benefits. It’s based on your average monthly income from the age of 21 until you become disabled and factors in up to 35 years of earnings. (The formula for retirement benefits is based on your 35 highest earning years.) Once you reach your full retirement age, your disability benefit changes to a retirement benefit that continues to pay out at the same amount. Taking disability does not reduce your retirement benefit.

If you have long-term disability insurance through an employer or a plan you purchased and can show that you became disabled before a certain age, these policies will pay a percentage of your salary annually until a specified end date, typically your full retirement age for Social Security. In general, once you notify your employer that you will apply for short-term disability benefits, which you may do after taking sick leave for seven days, you can request and submit the forms to the disability insurer. If your claim is approved, you will be paid the benefit for 26 weeks. After that, you will need to apply for long-term disability if you are still unwell.

Getting insurance companies and some self-insured employers to pay out these claims can be difficult — even more so for COVID-19 patients, Comerford says. Insurers are “being harder on long COVID cases because so much is unknown and a lot of physicians don’t know enough about the disease,” Comerford says. Finding a doctor experienced in treating COVID patients is important for documenting your condition.

Source: kiplinger.com

Raymond James: Facebook (FB) Stock Is a Buy, Growth Worries and All

Facebook (FB, $373.28) blew past Wall Street’s bottom- and top-line estimates when it posted results late Wednesday, yet FB stock slumped Thursday on concerns about decelerating second-half growth as it laps tougher year-over-year comparisons. 

But that doesn’t affect the long-term investment thesis on the name, insists Raymond James analyst Aaron Kessler, who reiterated his Strong Buy recommendation on Facebook stock and hiked his price target to $450 from $415.

“Facebook reported strong second-quarter revenue, with 51% foreign-exchange neutral ad revenue growth driven by broad-based strength across advertiser types and verticals (e-commerce, retail, and consumer packaged goods, as well as recovery in COVID-affected verticals like travel and media),” Kessler writes in a note to clients.

The social media giant’s second-quarter earnings per share (EPS) of $3.61 topped the Street’s forecast of $3.03 a share by a wide margin. Revenue likewise surprised to the upside, at $29.08 billion vs. expectations for $27.89 billion.

The market’s immediate problem with FB stock stemmed from the company’s short-term outlook. 

CFO David Wehner said Facebook projects year-over-year revenue growth to slow “significantly” through the end of 2021 as it comes up against difficult comps. Digital ad spending rebounded sharply in the second half of last year from a COVID-caused slowdown, in turn juicing FB’s top-line performance.

Wehner added that if the Street takes 2019 as its baseline, growth would slow “modestly” in the second half. 

Raymond James’ Kessler says “modestly decelerating growth on a two-year basis” doesn’t change the fact that the macroeconomic backdrop remains strong.

“We believe that the strength in the broader digital advertising industry is likely to persist, driven by continued digital transformation and that Facebook is a key beneficiary,” the analyst adds. “We continue to expect solid long-term revenue growth; monetization of newer platforms is increasing; and we believe valuation is attractive.”

Kessler views are very much in the majority on the Street. Of the 49 analysts issuing opinions on FB stock tracked by S&P Global Market Intelligence, 34 rate it at Strong Buy, seven say Buy, six call it a Hold, one has it at Sell and one says Strong Sell. Their consensus recommendation stands at Buy, with high conviction.

Analysts collectively forecast FB to generate average annual EPS growth of almost 22% over the next three to five years. That’s a notably rapid growth rate for a company of this size. Recall that Facebook’s market capitalization now tops $1 trillion. 

Lastly, the Street’s average target price of $406.39 gives FB stock implied upside of roughly 9% over the next 12 months or so.

Source: kiplinger.com

Stock Market Today: Stocks Finish Mixed as Fed Stays the Course

The Federal Reserve and Chair Jerome Powell brought a little cheer to parts of Wall Street on Wednesday, keeping benchmark interest rates steady (as expected) but also indicating that accommodative policy would stick around for some time.

In a release, Powell said that the U.S. labor picture would need to significantly improve before the central bank would pare back its monthly asset purchases.

“The Fed acknowledged that the economy has made progress towards meeting employment and inflation goals so we’re likely getting closer to an official tapering announcement, but we still think September is when that is likely to take place,” says Lawrence Gillum, fixed income strategist for LPL Financial.

“Some members continue to express concern about the slow pace of recovery in the labor market, while others are more concerned about rising prices and the economic impact as a whole. Either way, Chairman Powell likely spent most of this meeting wrangling with other Fed officials on the timing and pace of slowing the Fed’s asset purchases,” says Charlie Ripley, senior investment strategist for Allianz Investment Management. “With no imminent decision signaled at this meeting, it appears that it’s going to take a couple more meetings to get everyone on the same page.”

Also front-and-center today were several strong earnings-related performances. Google parent Alphabet (GOOGL, +3.2%) delivered a massive 62% year-over-year jump on revenues as advertising rebounded, Pfizer (PFE, +3.2%) topped Q2 estimates and raised its full-year guidance on strong COVID vaccine sales, and Boeing (BA, +4.2%) recorded a surprise profit after six consecutive quarterly losses.

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The small-cap Russell 2000 led the way with a 1.5% jump to 2,224. The Nasdaq Composite rebounded 0.7% to 14,762, and while the S&P 500 finished with a marginal decline, it closed well off the day’s lows, at 4,400. The Dow Jones Industrial Average dipped 0.4% to 34,930.

Other news in the stock market today:

  • McDonald’s (MCD, -1.9%) was the worst Dow stock today following the fast-food chain’s quarterly report. In its second quarter, MCD reported higher-than-anticipated adjusted earnings per share of $2.37 on $5.9 billion in revenue, up 259% and 57%, respectively, on a year-over-year basis. Additionally, global same-store sales surged 40.5% from the same period one year ago. In a subsequent earnings call, CEO Chris Kempczinski noted a “challenging labor environment,” but added that it was “getting better” in the U.S. He also said the company is monitoring supply chain issues and the global chip shortage, particularly “on the equipment side.”
  • Apple (AAPL, -1.2%) was another blue chip that fell after its quarterly earnings report, even as Wedbush called the iPhone maker’s fiscal third-quarter a “gold medal” performance. You can read all the highlights from AAPL’s “drop-the-mic” quarter here.
  • U.S. crude oil futures rose 1% to $72.39 per barrel.
  • Gold futures closed marginally lower at $1,799.70 an ounce.
  • The CBOE Volatility Index (VIX) slumped 5.5% to 18.29.
  • Bitcoin prices bounced a robust 6.3% to $40,307.11. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m. each trading day.)
stock chart for 072821stock chart for 072821

Is It Almost Infrastructure Week?

Another potentially bullish factor that flew under the radar: progress in Washington on an infrastructure deal. Specifically, a bipartisan group of senators agreed Wednesday on major issues for an infrastructure bill that would authorize $1.2 trillion in spending over the next eight years.

“Today was a critical step forward in passing the infrastructure bill; the main issue around payment appears to be resolved,” says Josh Duitz, portfolio manager of the Aberdeen Standard Global Income Infrastructure Fund (ASGI). “While we’re optimistic a deal will be signed before the August recess, the reality is that infrastructure investment is going to be strong going forwards regardless of what happens on Capitol Hill.”

Duitz notes that two potential beneficiaries – green energy and 5G communications – are already on the rise, and that a new bill would only accelerate the revolutions already under way.

Investors looking for intriguing opportunities in the event Washington’s bipartisan proposal becomes law should certainly explore both themes, but other industries could enjoy a lift, too. Read on as we delve into 14 of the best stocks to buy if America’s aging infrastructure finally receives a cash infusion.

Kyle Woodley was long BA as of this writing.

Source: kiplinger.com

Calculate Your Required Minimum Distribution From IRAs

This calculator makes it easy to compute your required minimum distributions from a traditional IRA, which started when you hit age 70½ if you were born before July 1, 1949, and start at age 72 if you were born on or after July 1, 1949. (The change in age was part of the SECURE Act, which was enacted in December 2019.) All you need is your age at the end of 2021 and the total balance of your traditional IRA accounts as of December 31, 2020. Do not include balances from Roth IRAs. Those accounts do not have required minimum distributions. 

If you’re married and your spouse is more than 10 years younger than you are — and is named as the sole beneficiary on at least one of your IRAs — the RMD will be less than what this calculator shows. Consult a financial planner for more details.

For your first RMD, you have until April 1 after the year you turn 72. All subsequent ones must be taken by December 31. For instance, if you turn 72 in 2021, you have until April 1, 2022 to take your first RMD. Then you would have to take your second one by December 31, 2022. 

Taking two RMDs in one year can have important tax implications. This could push you into a higher tax bracket, meaning a larger portion of your Social Security income could be subject to taxes, or you could also end up paying more for Medicare Part B or Part D.

To determine the best time to take your first RMD, compare your tax bills under two scenarios: taking the first RMD in the year you hit 72, and delaying until the following year and doubling up RMDs. 

You should also make sure you take your RMDs every year. Failure to do so means you get hit with a 50% penalty on the amount you were supposed to take out. For instance, if you were supposed to withdraw $18,000 but only took out $14,000, you would owe a $2,000 penalty plus income tax on the shortfall. 

But the IRS is known to be fairly lenient in these situations, and you may be able to get the penalty waived by filling out Form 5329. You will need to include a letter of explanation, including what steps you took to fix the mistake. 

One way to avoid forgetting: Ask your IRA custodian to automatically withdraw RMDs. 

Source: kiplinger.com

Shield Your Portfolio From Inflation

Investors fear inflation in the same way Superman dreads a pile of kryptonite. Just as the mysterious substance weakened the Man of Steel, a persistent rise in prices can diminish the strength of an investment portfolio. Inflation eats into returns and reduces the buying power of assets in investment accounts, such as 401(k)s. “Inflation has a scary connotation,” says Axel Merk, president and chief investment officer of Merk Investments.

Rising prices are especially scary for retirees with larger holdings of lower-return assets, such as cash and bonds. If inflation rises 3% every year, for example, a retiree who has enough saved today to spend $50,000 a year would need just over $67,000 a year by 2031 and more than $90,000 per year by 2041 to fund the same lifestyle, according to an analysis by Kendall Capital.

Wall Street is certainly scared of inflation, at least in the short run. The reopening of the economy has created a boom as pandemic headwinds subside, with price hikes driven by supply-chain bottlenecks and product shortages at a time when pent-up consumer demand has been fueled by government stimulus checks. Following a 40-year period during which inflation was mostly in hibernation, the nation is living through the biggest spike in prices in more than a decade for stuff such as gas, groceries and used cars.

In June, the consumer price index, the government’s main measure of inflation, saw a year-over-year increase of 5.4%, the largest rise since 2008. The prices that suppliers charge businesses (so-called producer prices) also rose in June at the fastest annual pace since 2010, and employers are boosting worker pay amid a tight labor market. Fund managers now say inflation is the biggest market risk, a Bank of America Securities survey found.

The $64,000 question (which was worth $60,726 a year ago, according to the government’s inflation calculator): Is higher inflation temporary, or is it here to stay? Federal Reserve chief Jerome Powell insists that the forces driving prices higher will wane and projects that inflation will fall back to around 2% in 2022. Powell downplays a repeat of 1970s-style inflation, when the CPI topped 13%, saying, “It’s very, very unlikely.” Most investment pros agree. Still, Kiplinger expects inflation to reach 5.5% by December, compared with December of 2020, and to average 4.3% for 2021 overall.

It’s worth noting that the stock market’s average annual gain of 10% has outpaced inflation over the long run. But don’t let your guard down. Historically, inflation spikes (such as the current episode), during which the CPI suffers one-month increases of 0.5% or more for at least three months in a row, have been a headwind for stocks, according to Bespoke Investment Group. In five of the previous seven such spikes since 1973, the S&P 500 index declined, suffering a median drop of 7.8%.

And don’t dismiss a common secondary effect of inflation: rising interest rates. Upward price pressures eventually prompt the Fed to increase borrowing costs and dial back bond-buying programs to cool a too-hot economy, a policy shift that can weigh on asset prices and spark volatility. In June, the Fed indicated that rate hikes could come next year, sooner than the 2024 start date it forecast in March.

The best inflation strategy is to hope for the best but plan for the worst. Judging from past inflationary periods, the investments below should provide a hedge against a persistent period of rising prices. (Prices are as of July 9.)

Classic inflation plays

Fight higher inflation directly by buying Treasury inflation-protected securities. The appeal of TIPS is that in inflationary periods, they “pay out more in interest and increase in value,” says Morningstar portfolio strategist Amy Arnott. The principal value (the initial price you pay for the bond) adjusts higher when inflation, measured by the CPI, increases. The interest you receive also rises because it’s based on the adjusted principal. You can purchase TIPS directly from Uncle Sam at www.treasurydirect.gov or invest in Schwab U.S. TIPS ETF (symbol SCHP, $63), a low-cost way (the expense ratio is 0.05%) to own a broad basket of TIPS.

Gold has a reputation for retaining its value when the dollar declines or loses purchasing power. Although the precious metal gets kudos as an inflation hedge, its performance during inflationary times is mixed. Gold tends to perform best during bouts of extreme inflation, such as in the 1970s when oil prices soared. It fares less well during more muted inflationary periods.

“Gold seems to outperform when chaos reigns supreme,” says Thomas Tzitzouris, managing di­rector at Strategas, an in­dependent research firm. And gold’s performance turns “poor … almost instantaneously at first sight of tighter [Fed] policy,” Tzitzouris warns. Still, earmarking a small portion of your portfolio to gold makes sense as an insurance policy in case the inflation dragon reappears and the Fed waits too long to tame it.

To get exposure to gold bullion itself, consider iShares Gold Trust (IAU, $34), which tracks the daily price movement of the yellow metal. Or you might invest in gold-mining stocks, says Merk. When the price of gold is rising, he says, the profits of gold miners increase because the cost of getting the gold out of the ground remains fixed. Mining company Newmont (NEM, $64) is a pro-inflation stock recommended by BofA.

Bitcoin has been growing in popularity as an inflation hedge, held out as an alternative to gold. But it’s best for investors who have a speculative bent and are able to stomach massive volatility, and it should be limited to the smallest of slices of your portfolio. Most brokerages don’t allow clients to buy bitcoin directly, but you can gain exposure through Coinbase, a crypto exchange, on the Robinhood trading app or via products such as Grayscale Bitcoin Trust (GBTC, 28).

Property prices and rents charged by landlords typically go up during inflationary periods, making real estate a popular investment if you want to outrun inflation. Over the past 30 years, an index of U.S. real estate investment trusts posted bigger gains than the S&P 500 in five of the six years when inflation was 3% or higher, according to data from fund company Neuberger Berman. Consider Vanguard Real Estate ETF (VNQ, $105). It owns publicly traded REITs including Crown Castle, which leases communications infrastructure such as cell towers, and Equinix, which specializes in data centers.

Dan Milan, managing partner at Cornerstone Financial Services, is bullish on Simon Property Group (SPG, $130). Simon’s upscale malls, he says, have held up better and can command higher rents than lower-end malls. Investment firm Stifel is bullish on self-storage REITs, such as CubeSmart (CUBE, $49) and Extra Space Storage (EXR, $173).

line graph of inflation increasing over the past year or soline graph of inflation increasing over the past year or so

Stocks and commodities

Stock sectors that tend to do well when the economy is booming—and inflation is often rising—include energy (think big oil companies); industrials (heavy machinery, building products and aerospace firms); and materials, or companies that provide commodity-related materials to businesses (such as suppliers of chemicals, steel and other metals).

To gain exposure to a broad range of raw material producers, consider Materials Select Sector SPDR (XLB, $83). Top holdings include chemical company Dow and paint maker Sherwin-Williams. Michael Cuggino, president and portfolio manager of Permanent Portfolio, recommends copper producer Freeport-McMoRan (FCX, $37). Goldman Sachs analysts cite paint producer PPG Industries (PPG, $171) and Scotts Miracle-Gro (SMG, $183), which sells lawn, garden and pest control products, as firms with pricing power and a history of turning a large slice of revenues into profits.

Top holdings in the Energy Select Sector SPDR ETF (XLE, $53) include oil giant ExxonMobil, oilfield services provider Schlumberger and energy exploration firm Pioneer Natural Resources. A good option for industrial companies is Fidelity MSCI Industrials Index ETF (FIDU, $55), which owns heavy machine manufacturers such as Caterpillar and John Deere.

To take advantage of rising demand and prices for commodities such as oil and gas, gold, corn, soybeans, sugar, wheat, and copper, consider Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC, $20). It’s the biggest, most liquid fund of this kind, has a reasonable expense ratio of 0.59%, skips the troublesome K-1 form at tax time and is outpacing 96% of its peers so far this year.

The ideal companies to own in any sector are ones that can pass along higher costs to customers because of strong demand for their products, says Milan, at Cornerstone. That “helps companies protect their profits,” he says. Stocks that Goldman Sachs analysts say check those boxes include Advance Auto Parts (AAP, $213), whose sales of auto parts to do-it-yourselfers and professional mechanics will benefit from commuters returning to work and Americans hitting the nation’s roads to travel again; Etsy (ETSY, $195), which Goldman Sachs says turns 74% of its total revenues into profit (the highest gross margin of the consumer discretionary stocks listed in Goldman’s “high pricing power” screen) from its e-commerce site that sells unique handmade and vintage items; and Procter & Gamble (PG, $137), which owns brands such as Pampers and Tampax and has already announced coming price hikes for some products to offset rising commodity costs.

Indirect beneficiaries

Inflation can be insidious for bond investors, whose fixed interest payments increasingly lose purchasing power and whose bond prices often decline as interest rates rise in response to inflation. Investing in business bank loans that have interest rates that reset higher when market rates rise is a good strategy for avoiding that dynamic.

Unlike fixed-rate loans, which always pay the same coupon (or income), floating-rate debt allows the bond holder to earn more when rates rise. These loans are typically made to firms with less-than-pristine credit, which means the risk of default is higher. A couple of choices to consider are Invesco Senior Loan ETF (BKLN, $22), a member of the Kiplinger ETF 20 (see more on the ETF 20), and T. Rowe Price Floating Rate (PRFRX).

During periods of rising inflation since 2000, small-company stocks have outperformed large-cap shares, according to the Wells Fargo Investment Institute. Small companies tend to shine when the economy is growing rapidly, as it is now. Plus, they currently have better profit-growth prospects and trade at cheaper valuations relative to large-cap shares, according to investment bank UBS. Consider Kip ETF 20 member iShares Core S&P Small-Cap ETF (IJR, $112).

To better capitalize on the growth that stocks provide, Milan touts companies that regularly boost the size of their dividends. The bigger the increase over time, the greater the chance of outpacing inflation, he says. He likes home improvement retailer Home Depot (HD, $322), which recently hiked its dividend by 10%. It’s a member of the Kiplinger Dividend 15 list of our favorite dividend stocks. Milan also favors snack and soda giant PepsiCo (PEP, $149), which currently yields 3.5%.

Finally, given that in­flation is a bigger issue in the U.S. than abroad, make sure you’re diversified overseas. Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, is bullish on emerging-markets stocks, particularly in commodity-producing nations such as Brazil and Russia. “Commodity-sensitive emerging markets are a good place to hide,” she says. Baron Emerging Markets (BEXFX) has exposure to both Brazil and Russia; it’s a member of the Kiplinger 25, the list of our favorite actively managed, no-load mutual funds.

chart of cost of living of different commonly purchased itemschart of cost of living of different commonly purchased items

Source: kiplinger.com