Inflation can strike fear in the hearts of even the ultra-wealthy. The question arises: how can one protect their assets in an inflationary environment that reduces purchasing power and erodes the value of real income? In fact, when inflation is high and markets are vulnerable to shifts, ultra-high-net-worth individuals should take extra precautions and create a plan to safeguard the wealth that has likely taken them years to build.
From diversifying investments across different asset classes and implementing tax optimization strategies to seeking sound advice from experts with specialized knowledge about effective risk management practices and understanding market fluctuations better, there are many steps one can take today to preserve their wealth for tomorrow. This article explores several ways the ultra-wealthy can seek to protect their fortune from inflation risks.
Wealth Preservation in High Inflation Environments
While there’s no way to fully escape inflation, one can employ certain strategies to lessen its impact on their financial picture. With the assistance of a trusted financial advisor, an ultra-high-net-worth individual might consider employing the following methods to combat high inflation:
Investing in inflation-resistant assets – Some investments are more insulated from inflation than others. When there’s high inflation, ultra-wealthy investors can consult with their financial advisors about moving a portion of their funds into investments that either benefit from inflation or are more resistant to it. Examples of investments that tend to be more resistant to inflation include real estate, REITs, companies in the consumer staple sector, Treasury bonds, TIPS (treasury inflation-protected securities), and precious metals like gold and silver. An advisor can provide further guidance after evaluating one’s specific circumstances.
Maintaining a diversified portfolio – Although many sectors are negatively impacted by high inflation, others aren’t and may even profit from it. Ultra-wealthy investors can potentially lower their overall investment risk and support the potential for growth by cultivating a diversified portfolio that includes, at least in part, investments from sectors that historically perform well during periods of high inflation, like consumer staples, retail, industrials, healthcare, and energy. These industries are typically more buffered from inflation because consumers still need to purchase products from the companies in these sectors (like food and electricity) even when prices are high.
Including more ETFs (exchange-traded funds) in one’s portfolio can also be helpful, given that they are comprised of many stocks and so naturally diversified. (Disclosures: ETFs are index-based products that allow investors to buy or sell shares of entire portfolios of stock in a single security. Moreover, an ETF is a type of investment vehicle whose objective is to achieve the same return as a particular market and is similar to an index fund in that it will primarily invest in the securities of companies that are included in a selected market.)
Reducing tax liabilities – It goes without saying that taxes can significantly affect one’s portfolio performance. To offset this impact during inflationary periods, ultra-wealthy investors should review and discuss various tax strategies with their tax and financial advisors. It might be advantageous, for instance, for one to move tax-inefficient investments into tax-exempt or tax-deferred accounts or to engage in tax-loss harvesting. Lowering one’s overall tax bill can help counteract the bite of inflation.
Achieving financial success during times of high inflation requires careful consideration and planning. By implementing certain strategies, however, one can certainly take steps to protect their assets. Even during turbulent economic times, it’s possible to achieve a sense of confidence in preserving one’s hard-earned money by following the sound financial advice of a trusted financial professional.