Inflation is making headlines in 2022. We asked Thomas Zuttermeister, Senior Portfolio Manager, for his insight on how clients can offset inflation’s effects.
What is the impact of inflation on Mascoma Wealth Management clients?
Inflation impacts everyone. It bumps up our costs like food, fuel, etc. Additionally, the Federal Reserve raises interest rates to reduce the inflation rate, which also adds to increased costs for borrowing and housing. The biggest impact is on clients with fixed incomes, as their purchasing power erodes over time with rising inflation.
What can clients do to offset the effects of inflation?
Their options include investing in dividend ETFs (exchange traded funds), real estate, and healthcare. Bonds don’t make sense during inflation because with interest rates rising, bonds will drop in value. We’re strong proponents of diversified portfolios to reduce all risks by spreading funds across different asset classes. This also helps lessen the impact of daily volatility in markets.
Why would dividend ETFs be a good option?
With dividend ETFs, you buy into companies that have market share and pricing power. These are ones that offer a unique service or product and have relatively limited competition. Companies in sectors like financial services, healthcare, and technology are doing well despite rising rates because people consistently want and need what they offer. Think large retail chains, drug manufacturing, consumer electronics, and credit cards. They can afford to pay regular dividends on their stocks. Those dividends can be taken as income or reinvested.
And why do healthcare and real estate make sense as investments right now?
Healthcare is strong because the products and services offered are always needed and pricing is less of a factor. If you need a knee replacement, you need a knee replacement…there’s not that much of a choice. So, when a healthcare product or medication leaves the manufacturer, someone will pay for it, whether it’s you or your insurance company.
In real estate, with interest rates moving up and the market pricing some people out of home purchases, there is high demand for apartments and affordable housing. If people can’t find a home to buy, they need a place to live. Other high demand real estate includes student housing, hospitals, parking garages, and warehouses. There are several real estate ETFs such as FREL and VNQ that offer attractive dividends.