With the U.S. 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 shouldn’t overhaul their portfolios because of some recent bad headlines.
It’s important to note that the national debt’s effect on retirement portfolios is indirect. Higher debt servicing costs are the result of the government issuing new paper as old paper gets paid off. The new paper will have higher coupon rates, which means the government must cut spending, raise taxes, or take on even more debt, which is how portfolios will be impacted.
“The real question here is more: how will the combo platter of a higher interest rate environment and a recession impact both government and personal finances,” said Dave Nadig, financial futurist at VettaFi.
To protect retirement portfolios from the risks related to inflation and interest rate hikes, investors should diversify their portfolios with investments that keep pace with inflation. SmartAsset advises that one such investment is Treasury inflation-protected securities (TIPs), which increase investment principal with inflation and decrease with deflation.
“The inflation adjustment on TIPs can be a lifesaver over the long term, but mechanically, it’s not going to necessarily mean you earn a nice yield on top of inflation,” Nadig said. “For that you probably need something a bit riskier than a government bond, TIPs or not.”
Investment vehicles that invest in property such as real estate investment trusts (REITs) also usually keep up with inflation over time. They can also outperform the market when inflation is highest.
“Real assets are often the go-to strategy to participate in inflation. Not fight, participate. When you buy, say, a commercial REIT, you’re betting that those headlines you read about real estate prices going up will make your REIT go up — you’ll be part of the inflation story,” Nadig said.
Commodities are another common investment associated with hedging against inflation. When inflation accelerates, the price of commodities funds tends to rise, since, not surprisingly, the price of commodities used to produce goods and services goes up when the cost of those goods and services increases during inflation. The major caveat Nadig offered here is that commodities markets “are just as fickle as any other market, and they’re just as susceptible to supply and demand for the securities themselves.”
“So, if ‘everyone’ decides, ‘Copper is the hedge,’ and then everyone buys all the copper they can to hedge, well, when the worm turns, those bubbles can unwind just as fast,” he explained. “You need only look at a chart of oil in the last month to realize how fast.”
The bottom line, according to Nadig, is that it’s “worth paying attention to inflation.” But repositioning one’s “entire portfolio because of a few quarters of bad prints is probably a mistake.”
“Looking for diversification opportunities that will be sensitive to rising prices, however, can make a lot of sense,” he said.
Nationwide offers a suite of actively managed ETFs within equities for financial advisors. These funds include the Nationwide Nasdaq-100 Risk-Managed Income ETF (NUSI), the Nationwide S&P 500 Risk-Managed Income ETF (NSPI), the Nationwide Dow Jones Risk-Managed Income ETF (NDJI), and the Nationwide Russell 2000 Risk-Managed Income ETF (NTKI).
For more news, information, and strategy, visit the Retirement Income Channel.