Combating Inflation: How to Reduce Portfolio Risk With Real Assets

The investment landscape has seen some notable shifts in recent years, leading to changes in investor behavior. Some of these changes have been a direct result of the COVID-19 pandemic, while others have been driven by the growing popularity of meme stocks and digital assets.

Concerns about volatility and inflation have also increased over the past two years, a trend that appears poised to continue in the year ahead. Currently at a 40-year high, inflation has many investors concerned about their finances—and the long-term performance of their portfolios. 

As we look to the year ahead, inflation seems to be one of the biggest challenges facing investors, and knowing what to expect is important when it comes to managing risk.

The Impact of Rising Inflation

Before we dive into some of the strategies that can be used to combat inflation, it’s important to have a clear understanding of how inflation has increased over the past two years and how that increase is impacting the markets.

According to the Bureau of Labor Statistics, the Consumer Price Index, an index that tracks inflation, increased by 7.5% between January 2021 and January 2022. This is the largest 12-month increase the CPI has seen since 1982, affecting a wide range of consumer goods including groceries, cars, and housing.

In addition to affecting the prices of goods and services, inflation is also known for causing volatility in the markets. This is due largely to inflation’s varied impact on stocks, , a trend that has historically caused market swings and investor anxiety. The anticipation of this happening often causes market swings, so it’s important to keep this in mind as you review and adjust your investment strategies.

Why Rebalancing Can Help to Offset Risk 

Rebalancing is one of the best ways to combat the effects of inflation, mainly due to its ability to offset risk. Depending on your current investment strategy, rebalancing may include selling certain assets such as equities and buying others such as bonds. Your risk tolerance and current allocation should play a key role in determining the best asset mix. Whether you’re an active or passive investor, rebalancing can be a great way to maintain portfolio performance.

The Importance of Diversifying with Real Assets

A helpful way to do this is through real assets such as commodities, real estate investment trusts (REITs), natural resources, and gold. Due to their low correlation with more vulnerable assets, real assets may outperform during periods of inflation. This is because they’re not subject to the same inflationary pressures. For example, gold does not lose value the same way many currencies do during inflationary periods and commodities historically increase in value relative to supply and demand.

With exposure to a range of real assets, ETFs can be a helpful way to access many of these inflation-fighting benefits. The VanEck Inflation Allocation ETF (RAAX) is a solid example, allocating to assets such as commodities, as well as income-producing assets such as (REITs). As a risk-weighted fund, it also offers a stable risk profile and seeks long-term total returns.

With supply chain issues and geopolitical events continuing to endure, inflation is likely to stick around, and it may even accelerate. By reassessing your portfolio and including a mix of real assets, you can help offset inflationary risks, protect your portfolio, and position yourself for ongoing growth.

Disclosures 

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

CPI – US CPI Urban Consumers YoY NSA Index measures US consumer prices (CPI) as a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate.

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