My first response to that question would be: “Well, you’re already ahead of many investors because you realize that rising inflation should trigger adjustments in your portfolio.”
But by “adjustments,” we do not mean tweaks to a portfolio to keep it safe until inflation calms down. Instead, we mean identifying those sectors in your investments that historically suffer the most from high inflation, as well as those that suffer considerably less, or even thrive.
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That is the first step in finding opportunities amidst an inflation spike. The good news is that historical data provides guidance and precedence for homing in on “inflation opportunity sectors.”
Of course, if you have been working with an astute financial advisory firm, you have already diversified your portfolio to include “safe” investments and “volatile” investments. Our firm calls this strategy “Tactical Allocation,” which, when it comes to equities, looks at two factors to measure an investment’s risk—its capitalization and what we call its “style.”
A firm’s equity capitalization, or the total value of its shares in the market, fits within three designations: large-cap, companies with a market capitalization of more than $10 billion; mid-cap, with a capitalization of $2 billion to $10 billion; and small-cap, with a capitalization under $2 billion. In most instances, the size of a firm’s capitalization determines its level of risk, with large-cap companies presenting the least risk.
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As to a firm’s “style” of investing, there are three: 1. “value style,” with a slow-growth/low-risk approach; 2. “growth style,” where a high-risk/fast-growth approach dominates; and 3. “blend style,” where neither value nor growth dominate.
If we add high rates of inflation to this mix, yes, a portfolio will most likely need some sector adjustments based on an investment sector’s resilience during an inflation/interest rate fluctuation period. For example:
With Low Interest Rates (currently): We would overweight investments in energy, materials and health care and underweight investments in info technology and “consumer discretionary” sectors.
With Rising Interest Rates (most likely this year): We would make adjustments to overweight consumer staples, health care, telecommunications and utilities, while underweighting industrials, info technology and financials.
With High Interest Rates
(hopefully not): We would overweight real estate, financials, industrials and consumer discretionary while underweighting energy, telecommunications and utilities.
To sum up, every portfolio is different, of course, and many factors determine which investments get overweighted, underweighted or even left unchanged. But when inflation rises and, in turn, interest rates increase, the way to avoid risk and take advantage of opportunities, is to put more emphasis on sectors that perform the best when those two factors are in play.
ABOUT JENNIFER KIM
Jennifer Kim, MS, CFP®, CMFC®, ChFC®, CLU®, is a Managing Senior Partner at SEIA. Currently, she is a licensed independent insurance broker with Signature Comprehensive Insurance Services, LLC (SCIS). Her specialties include estate planning, retirement planning and corporate benefits. Jennifer has been in the investment management and insurance business since 1993. She has written several articles for Worth, Angeleno and LA Confidential magazines on various financial topics. Jennifer has had numerous speaking engagements, including the USC County Hospital, the Writers Guild of America, Panda Express and Charles Schwab.
$17 BILLION Assets managed as of 12/31/2021 SEIA & its affiliates.
seia.com | jkim@seia.com | 310-712-2323 | 2121 Avenue of the Stars #1600 Los Angeles, CA 90067
Disclaimer
This article is not intended as, and financial representatives do not give, legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.
Signature Estate & Investment Advisors, LLC (SEIA) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Securities offered through Royal Alliance Associates, Inc. member FINRA/SIPC. Investment advisory services offered through SEIA, LLC, 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc. (CA Ins. License #0B11807).
