Stagflation is a term used to describe the economic conditions during a period of stagnant economic growth that is combined with inflation and a high level of unemployment. While such conditions can hurt investors, it is possible to be successful even during stagflation by choosing investments carefully.
1. Diversify your portfolio if it tends to be heavily weighted in one area, particularly if the focus is on aggressive growth stocks. Add in some relatively stable investments, such as non-cyclical stocks, to reduce the impact of sudden economic changes.
2. Seek stocks that share the characteristics of low debt-to-equity ratios, pricing power and good margins. Such stocks historically have fared well during stagflation, such as that which occurred in the 1970s. While the purchase of these types of stocks is no guarantee of success, those that have these three things in common are likely to do well and to provide stability for your portfolio.
3. Invest in commodities that are likely to do well even in difficult times. Consider adding oil, coal or gas to your investments. Other areas that may do well include those related to food production, such as fertilizer. Precious metals such as gold, silver and uranium are also often a good addition to your investment portfolio and should be considered.
4. Avoid investments that are not likely to grow as fast as the rate of inflation. Typically accounts that hold cash and pay a small return, such as interest-bearing bank accounts and certificates of deposit, are a poor choice in a stagflation economy. Money market funds, treasury bills and most kinds of bonds also fall into this category.
5. Keep away from investments that revolve around discretionary spending, such as entertainment, hotels and airlines. While some of these stocks may do well, it is likely that they will suffer as a whole during stagflation as consumers reduce or eliminate unnecessary spending.
- Using several different kinds of investments to diversify your portfolio, such as a combination of stocks, bonds and commodities, is likely to offer you more stability in times of stagflation than a portfolio that only contains one type of investment, such as stocks.
- Past performance is no guarantee of future success. While it is highly recommended that you carefully study the historical performance of any investments you are considering, it is important to remember that change can happen quickly, and what appeared to be a good investment may turn out to cost you money.
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