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Hedging Against Inflation: Protecting Your Portfolio Against Market Fluctuations

It is difficult to deny we live in volatile times. The sanctions imposed on Russia following its invasion of Ukraine have sent the Russian economy into a freefall that is likely to have ramifications on the sanctioning nations as well. As COVID-19 transitions from pandemic to endemic, economic stability may be a long time in coming. Meanwhile, all the money produced and spent on COVID relief, as well as supply chain interruptions and unfulfilled consumer demand have led to serious inflation. With uncertainty the only worldwide certainty, protecting one’s portfolio from volatility and ensuring reliable gains becomes an investor’s greatest priority.

Inflation especially can be a major threat to one’s investments. The math is straightforward: if money has less value, investments are less valuable. Unchecked inflation is itself volatile, as it can both raise and lower the cost of borrowing, and do the same for unemployment. Thus while inflation is making investments less inherently valuable at their current total, it is also threatening to reduce that total, as more sensitive investments suffer in the wake of economic downturn. Investors hoping to counter volatility with stability should make sure their money is always working for them.

Growth And Value

Growth stocks are one particularly straightforward way to safeguard against inflation. If investments are losing value both in dollars and per dollar, a growth stock will increase the value of a portfolio, combating at least half of the problem. Growth stocks are shares in any company expected to grow at a significantly higher-than-average rate for the market, with the premise of providing profits through capital gains and the eventual sale of the shares.

Normally contrasted against growth stocks, value stocks belong to companies whose shares trade at a lower price than indicated by its fundamentals. These are the classic “buy low, sell high” stocks where the investor assumes the price will rise to better reflect the company’s intrinsic value. Where a growth stock counters inflation and volatility through reliable growth at a high price, value stocks offer low-cost chances to increase value. In times of high inflation, investors can purchase value stocks at a low price without much risk, knowing one especially successful value stock could pay for all the rest.

Reliable Growth

While individual growth stocks and value stocks could both provide a substantial return-on-investment, investors looking to emphasize stability may choose to invest in broad-based mutual funds. There are also mutual funds which focus on specific asset classes that generally perform well during periods of high inflation, including gold, commodities (such as oil, wheat, and precious metals), real estate investment trusts (REITs), and Treasury-Inflation Protected Securities (TIPS). Investors could also consider equity income mutual funds that pay high dividends as a way to offer greater protection against inflation.

Stay Off The Sidelines

What all of these investments have in common is that they are active steps to mitigate or hedge against inflation. Investors may see pulling money out of the market or simply not investing further as the commonsense reaction to a crisis, but such an approach leaves money sitting on the sidelines rather than working to bolster a portfolio and could lead to greater losses down the road. Especially since the best strategy when faced with inflation is the tried-and-true strategy of diversification: spreading one’s assets out into several or all of the above markets, so that no one crisis or unforeseen disaster can ruin a portfolio.

In trying times like these, market ups and downs are inevitable. The best advice to give investors is to counter volatility with stability and uncertainty with confidence. Keeping one’s money in the market through hedges against inflation is a sound way to create a resilient portfolio.

Christopher Crawford is the Head of Sales & Marketing for the Buffalo Funds. He has over 10 years of experience in the financial services industry, previously holding positions at Invesco, IMA Financial Group, and Arthur J. Gallagher. At the Buffalo Funds, Christopher works with investment consultant relations, key account management, institutional distribution and client service. His main goal is to partner with advisors to bring business building ideas and provide unparalleled customer support to their business, always striving to make it easy and reliable to work with the entire Buffalo Funds investment team. Christopher received an M.B.A. from Washington University in St. Louis and a B.S.F.A. from Southern Methodist University. He also holds licenses for the Series 7, Series 63, and Series 65.

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Christopher Crawford
Head of Sales and Marketing