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Preparing Portfolios for Resilience Against Inflation Surprises

By Advisor Perspectives
Financial Services

Many investment portfolios that rely heavily on stock-bond diversification to manage risks may not be protected against inflation surprises. Real assets offer a solution.

Inflation in the U.S. has accelerated from near zero in 2015 to 2.5% in 2018 (according to the Consumer Price Index or CPI), propelled by trade tensions, strong consumer spending, the tight labor market, and a boost in growth from tax reform and other fiscal stimulus. After so many years of low inflation, the rise in 2018 points to the possibility of an inflation surprise.

Such a surprise could be damaging because many investors may be too reliant on diversification achieved by investing in a portfolio of stocks and bonds, which is predicated on the historical negative correlation between the two asset classes. However, this diversification may not work as well going forward because correlation between stocks and bonds tends to rise when inflation is elevated. Therefore, we suggest investors consider real assets (inflation fighters) to make portfolio diversification more robust and hedge against the risk of higher inflation.

Read more at Advisor Perspectives.

Photo: iStock

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