Stagflation Investing: What Is It and Why Should Investors Be Careful?
This investing strategy has resurfaced as investors become concerned about growing inflation and its impact on markets, but what exactly is stagflation?
There's a lot going on in the market right now, and if you're scratching your brain and wondering what Stagflation investing is, you're not alone. But first, here's an explanation of this investing technique…
What exactly is stagflation?
Stagflation is also known as recession inflation. This period is characterized by rising high inflation, high unemployment rates, and a stagnant (or slow) economy.
The phrase “stagflation" initially appeared in the 1960s, when a British politician used it to characterize the combination of job stagnation and price inflation.
Throughout history, rising inflation and high unemployment have hampered economic growth in major markets, thereby affecting investors. During a period of Stagflation, people earn less while spending more on products and services that have increased in price due to high inflation.
What exactly is Stagflation Investing?
Investors utilize stagflation investing to limit the risks associated with high inflation and low unemployment in their investments.
During the 1970s Stagflation, investors quickly learned that relying simply on US equities would not allow them to handle inflation risks. As a result, investors realized how critical it was to diversify their investment portfolios.
What equities should I invest in during a period of stagflation?
Value stocks, which have higher current cash flows, have historically outperformed in high inflation situations, making them attractive equities to buy during periods of stagflation. NRG Energy (NYSE: NRG), AbbVie (NYSE: ABBV), and PulteGroup (NYSE: PHM) are a few examples of lesser-known value companies.
Identify high-performing equities during a period of stagflation.
The pandemic had a varied impact on each country and each industry. During the health crises, retail, media, and healthcare were all put under enormous strain. Meanwhile, sales of internet behemoths Amazon (NASDAQ: AMZN), Facebook (NASDAQ: FB), Apple (NASDAQ: AAPL), and Netflix (NASDAQ: NFLX) surged as people turned to technology for leisure and to work remotely.
To survive Stagflationary situations, investors should conduct due diligence on their portfolios in order to remain ahead of the curve. You should be able to weather the storm if you invest in a diverse combination of growth and value stocks.
Remember that these are also wonderful times to buy the drop on growth stocks while your value starts performers help you get through Stagflationary periods.
Investing Suggestions for Stagflation
- If you have a lot of growth stocks, which are riskier, or if your portfolio is not appropriately diversified, and you see the economy headed into Stagflation, it's time to reduce your risk tolerance. ETFs, value stocks and commodities such as energy and gold are all options.
- The greatest method to limit the dangers connected with Stagflation is to build a robust long-term investment portfolio. We recommend that you try to ignore all of the short-term noise and focus on developing a robust portfolio of investments that will perform well in the future.
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