October 27, 2022
2022 has forced us all to reevaluate our investing strategies, and maybe that’s not such a bad thing after all. Although it might be a bit of a bummer in the meantime to watch the red drip down your portfolio, ultimately times like this can help make us better investors, equipped with new layers of knowledge and experience we might not have had otherwise.
A thematic recurrence throughout this bearish market environment has been a trend toward defensive investing for those aiming to protect their holdings, shifting the mindset from growth to preservation as an adaptation to the market we’re in.
In concert with that movement, we thought it timely to bring a few examples to help protect your portfolio from inflation, recession, or just plain red days.
A few stocks and sectors to look at:
Those that benefit from inflation.
Wait! How could anything profit from inflation?
Some companies are suffering because of inflation, whereas others may be thriving as a result of it. Which side of the coin a business falls on largely depends on its product, and there are a few industries raking in even more now during this inflationary environment. So, like what?
This isn’t an investment recommendation, just a means of pointing out some stocks and characteristics that tend to fare better during inflationary environments.
Example: The energy industry. Big-name oil and gas companies are up 35% or more in a year when most of the market is down 20% or more. Wonder why?
But before, dive into the top Energy Stocks by Market Cap.
Those with a high Sharpe ratio
The Sharpe ratio is a means of measuring return against risk, and helping investors ascertain whether or not the risk is worth the reward when it comes to a stock. Investments with a ratio of less than one are considered to be “sub-par” by the ratio’s standards, whereas a ratio of 1 or more is generally a solid bet.
Stocks with a higher Sharpe ratio can sometimes perform better in a volatile environment because, as the ratio indicates, these stocks are prone to perform well relative to their risk.
Example: Coca-Cola ($KO) currently has a Sharpe ratio of 1.16, $DHI, one of the nation’s largest public construction companies, presently carries a ratio of 1.46, and Kroger ($KR) has a Sharpe ratio of 1.27, and these are just a few examples.
Stocks well below their long-term moving averages
A moving average is simply the long-term average trading price of a stock taken over a given period. 10-20 day averages are typically used for shorter-term prognosticating, whereas 50-100 days is a good mid-term range, and 200+ day MAs are used for long-term trend identification.
The reason it might be a good idea to check into stocks trading well below their long-term averages during times of high inflation is because it often means the stock has strayed far from its normal course, often having been beaten down by inflation or unflattering earning reports, which can sometimes limit the downside and leave more room for long-term profits.
Upon a closer look, although some of these stocks might be rightfully low, there will be a few gems that don’t belong so far down, meaning that if you pick it up this low, your risks for further losses may be decreased.
Stay Curious: Why is inflation doing us dirty?
There are many different ways to shield your portfolio from inflation’s impacts, and no one method is sure to get the results you desire, as all are equally fallible. But, these stocks that fit characteristics like the ones listed above are sought out during times of high inflation for a reason and are generally solid strategies to undertake.
Ultimately, stock picking is a hit or miss game, so doing your best to use discretion and make wise choices based on your own personal criteria is always your best bet when picking stocks that will hedge against inflation.