Here’s how to structure an inflation-oriented portfolio

Published 6:35 pm Friday, September 16, 2011

Among the risks that investors in or nearing retirement must deal with is inflation risk, the possibility that rising prices will erode their purchasing power.

In this regard, it’s important to understand that what may seem like a relatively-mild inflation rate can pose a significant risk over the long term. For example, if prices were to rise 2.5 percent a year for the next 30 years, $500,000 in today’s dollars would retain less than half ($233,942) of its original buying power at the end of that time. (Note that this calculation doesn’t take into account any returns that might be earned on that money during those three decades.)

With this in mind, how should you structure your retirement portfolio? The overriding consideration here is asset allocation — what percentage of your portfolio to allocate among different asset classes such as stocks, bonds and cash alternatives.

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Each individual’s financial situation is unique and therefore requires a specifically tailored asset allocation strategy. However, investors who are concerned about inflation may want to consider increasing their allocation to stocks — but not just any stocks.

In inflationary times, investors will generally want to investigate stocks of companies in industries that have pricing power, meaning that consumers need to buy their products even when their prices are increased. Examples of so-called “defensive” industries include health care, consumer staples and food products. Within these industries, it’s usually wise to focus on the dominant companies — typically large, well-established firms that have proved their ability to do well in a variety of business environments.

The value of dividends

Equities are also worth considering for another reason — dividends. Many people rely on dividends for income during retirement, and rising dividends can offset, to some degree, the higher prices associated with inflation.

However, it’s important to remember that stock prices can fluctuate considerably, and that dividend payments can fall as well as rise. Retirees should get expert advice before increasing their commitment to equities, and on deciding whether to rely on dividends as cash flow or whether to reinvest them. The key point is to weigh the risks of owning stocks against the risks of losing purchasing power to inflation.

Another asset class to consider is Treasury Inflation-Protected Securities (TIPS), which pay interest twice a year in amounts that reflect the current inflation rate. While you can’t control inflation, a portfolio containing carefully selected stocks and an allocation to TIPS can help mitigate the impact of inflation. Asset allocation does not guarantee a profit nor protect against loss.

This material was prepared by Raymond James for use by its advisors. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

Stephen P. Poitevint is a Registered Principal and Financial Advisor with the firm of Raymond James Financial Services, Inc., member FINRA/SIPC, and is located at 908 Tallahassee Hwy. in Bainbridge, and can be contacted at (229) 246-7208 or