Four Tips to Protect Portfolios in a Rising Rate Environment

U.S. inflation hit a 40-year high in November, rising 6.8% on a year-over-year basis.

Gas prices have jumped 58%, used cars are up 31%, and the price of food has risen over 6% over the same time frame.

But whether inflation is short-lived or here to stay remains up in the air. In this infographic, we take a look at four investment strategies to help investors manage risk during a rising environment.

1. Prepare for Inflation

Why it works: In an inflationary environment, one strategy is to identify companies that can both pass on rising costs and those that benefit when prices are rising.

Often, these companies possess:

• Strong brands
• Monopoly pricing power
• Strong margins

Here are industry groups that could stand to benefit the most when the market expects inflation to rise:

• Banks
• Energy
• Autos & Components
• Capital Goods
• Financials

Banking and financials have greater pricing power and can increase their prices when inflation rises. Cyclical industries, such as energy and capital goods—also known as industrials—also tend to outperform as their prices are linked to the Consumer Price Index.

2. Look for Solid Fundamentals

Why it works: Inflationary environments affect real returns. To combat this, look for strong fundamentals that help drive performance.

Across a study of 2,258 firms over 15 years, companies that performed the highest on these two variables generated over two times the returns of average firms.

Separately, findings show that companies who focus on long-term growth and economic profit also typically created more value and job creation.

That’s why stock selection is critical. Investors can access these types of stocks through a range of actively managed strategies such as ETFs, multi-asset funds, and mutual funds.

3. The Data Behind Long-Term Investing

Why it works: Based on 148 years of S&P 500 Index return data, the odds of losing money in U.S. large-cap stocks significantly decreases over the long run.

Over a one month period, there is a 39% chance of losing money—but this plummets to 0.1% over 20 years. Even during a rising environment, staying invested over a longer period of time helps manage risk when compared to shorter-term periods.

4. Avoid Common Investing Mistakes

Why it works: Being aware of common mistakes can prevent investors from missing out on significant return opportunities or expose them to greater risk.

Since inflation can be unpredictable, investors can take note of some practices that they can control, as shown in the investment strategies above. By the same token, here are the top four to avoid:

Not only was market timing the most common mistake, it is considered the most detrimental. In fact, timing the market led to 71% more volatility compared to buy and hold strategies over a 30 year period.

Investment Strategies for the Year Ahead

Backed by a broad set of data, these investing tips can help investors focus on the big picture during a rising environment. Regardless of the market, these investment strategies can help build confidence and help to better manage portfolio risk.