Oith the US national debt crossing the $30 trillion mark for the first time in early 2022, investors will need to keep this in mind when structuring their retirement portfolios. However, investors should not revise their portfolios because of some recent bad news.
It is important to note that the effect of national debt on pension portfolios is indirect. Higher debt service costs are the result of the government issuing new paper as old paper is paid off. The new paper will have higher coupon rates, which means the government must cut spending, raise taxes, or go into even more debt, which will affect wallets.
“The real question here is more: How will the combined plateau of a higher interest rate environment and a recession affect both public and personal finances,” said financial futurist Dave Nadig. at VettaFi.
To protect retirement portfolios from the risks associated with inflation and rising interest rates, investors should diversify their portfolios with investments that keep pace with inflation. smart asset advises that one such investment is Treasury Inflation-Protected Securities (TIPs), which increase investment capital with inflation and decrease with deflation.
“Adjusting inflation on TIPs can be a long-term lifesaver, but mechanically it doesn’t necessarily mean you earn a good return on top of inflation,” Nadig said. “For that, you probably need something a little riskier than a government bond, TIP or not.”
Investment vehicles that invest in real estate, such as real estate investment trusts (REITs), generally track inflation over time. They can also outperform the market when inflation is highest.
“Real assets are often the strategy of choice for participating in inflation. Don’t fight, participate. real estate will drive up your REIT – you’ll be part of the inflation story,” Nadig said.
Commodities are another common investment associated with inflation hedging. When inflation picks up, the price of commodity funds tends to rise since, unsurprisingly, the price of commodities used to produce goods and services increases when the cost of those goods and services increases during inflation. . Nadig’s main caveat here is that commodity markets “are just as volatile as any other market, and they are just as sensitive to supply and demand for the securities themselves.”
“So if ‘everyone’ decides, ‘Copper is the hedge,’ and everyone buys all the copper they can to hedge, well, when the worm spins, those bubbles can unfold all so fast,” he explained. “You only have to look at a chart of oil from last month to realize how fast.”
The bottom line, according to Nadig, is that it is “worth paying attention to inflation”. But repositioning “his whole portfolio because of a few quarters of bad impressions is probably a mistake”.
“However, looking for diversification opportunities that will be sensitive to rising prices can make a lot of sense,” he said.
Nationwide offers a suite of actively managed ETFs within stocks for financial advisors. These funds include National Nasdaq-100 Managed Income Risk ETF (NUSI)the S&P 500 National Managed Income Risk ETF (NSPI)the National Dow Jones Risk-Managed Income ETF (NDJI)and the National Russell 2000 Managed Income at Risk ETF (NTKI).
For more news, insights and strategy visit the Retirement income channel.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.