Why real assets beat TIPS for inflation protection: Northern Trust

What do you want to know

  • Over time, a slight rise in inflation can significantly reduce the income of a retirement portfolio.
  • Advisors should include real-asset stocks in portfolios to allow them to grow with inflation, says Northern Trust.
  • Yet sectors like commodities tend to underperform when inflation is at normal levels, the asset manager finds.

With inflation hitting 7% annualized — the biggest 12-month increase since 1982 — as reported by the U.S. Bureau of Labor Statistics on Wednesday, if advisers have yet to adjust their client portfolios, it is probably time they did.

Indeed, inflation can eat away at retirement portfolios even when it only exceeds 2%. That’s why, according to Northern Trust Asset Management, it’s essential to add certain elements to a retirement portfolio that not only help increase returns as inflation rises, but help curb portfolio erosion.

For example, an inflation difference of only 1% for an investor with 10 years to go would lead to a 14% decrease in his retirement income. In the long run, if an investor started saving at age 25 and the retirement portfolio was $610,000 at age 67 in real terms, the annual retirement income would be $55,000. But at a 3% inflation rate, that balance is reduced to $401,000 and reduces retirement income to $36,000 per year.

What to do?

“We’re certainly hearing from advisors saying that inflation is one of their top concerns,” said Nadia Papagiannis, practice lead, model portfolios at NTAM. “And it’s not necessarily the level of inflation, but the fact that prices are going up and [investors] need to ensure that yields and incomes increase enough to cover this. »

The key, then, is to inject specific inflation-linked investments into a portfolio — NTAM recommends an allocation of 8% on the high end and 4% on the moderate-to-conservative end, she says.

The best products are real assets, which can pass on costs in times of inflation, meaning “they get more revenue as prices go up,” she says.

These products include natural resources, real estate and infrastructure, but buying securities – not the commodity itself – is easier for clients to understand and will provide a superior source of income than traditional stocks and bonds. .

“For example, for natural resources, energy companies, and real estate, landlords can pass on costs through higher tariffs, and for infrastructure, utilities can pass on costs. [higher costs]“, she notes.