Jamie Dimon, CEO of JPMorgan Chase (NYSE: JPM), recently told investors that the bank had “stored cash” to prepare for a potentially inflationary environment. The country’s largest bank currently has $ 500 billion in liquidity, which it is prepared to deploy if interest rates rise. Here’s what that means for JPMorgan and, more importantly, what you can do to prepare your own portfolio for inflation.
Image source: Getty Images.
JPMorgan Chase Racks Up Money To “Protect Big Cocks”
Dimon said we need a better rate structure that reflects the inflation he believes is coming. He also mentioned that JPMorgan Chase “will seek to protect big cocks,†which are just extreme risks that exist outside of the norm.
Dimon is not necessarily saying inflation is a lock to happen. However, this means that the bank sees inflation as a potential risk that could get out of hand.
If inflation were to stay higher than the Federal Reserve is comfortable with, the Fed will likely respond by raising interest rates. In this scenario, JPMorgan Chase will reinvest its cash at better interest rates. Ultimately, Dimon wants JPMorgan Chase to be “a safe harbor” for any storm on the horizon.
Dimon is not the only one sounding the alarm on inflation. During Berkshire HathawayAt the May annual meeting, CEO Warren Buffett said, “We are seeing very significant inflation. … People are raising the prices for us and it’s accepted. Morgan stanley CEO James Gorman has said he expects rates to rise early next year, going against the Federal Reserve’s expectations of rate hikes in 2023.
How to prepare your portfolio for potential inflation
JPMorgan Chase’s strategy makes sense for the big bank. However, there are some things investors can do to protect their portfolios from inflation.
First and foremost, investors should always diversify their portfolios, and preparing for inflation is no different. Try to hold assets that will benefit from the ripple effects of rising inflation.
Commodities and commodity producers, value stocks and real estate investment trusts (REITs) can all be good stocks that investors can buy to hedge against inflation. These assets tend to be more resistant to inflation. In fact, in an interview with CNBC, legendary investor Paul Tudor Jones said, “The only thing I’m sure about is that I want to have 5% gold, 5% bitcoin, 5% cash and 5% in raw materials. ”
Commodities include things like precious metals, electricity, beef, and other items. the iShares S&P GSCI Commodity-Index Trust is an ETF that could give you broad exposure to commodities including energy, agriculture, and metals. Inflation tends to rise as commodity prices rise, and when commodity prices rise, it tends to be favorable to those who produce them.
REITs are another great investment to hedge inflation. Indeed, real estate prices and rental income are expected to increase at the same time. Companies that can more easily pass costs on to customers tend to be good hedges against inflation.
the Vanguard Real Estate Index Fund can be a way to gain exposure to the wider real estate market. If you are looking for a business to own in this space, Arbor Real Estate Trust is a good dividend paying REIT that you can trust.
Image source: Getty Images.
As inflation and interest rates rise, interest rate sensitive companies like banks and insurers will also benefit. Banks make money on the difference between the interest rate earned and the interest rate paid on deposits. In this space, you could own the SPDR Financial Select Sector Fund, which gives you exposure to these top financial institutions including Berkshire Hathaway, JPMorgan Chase and Bank of America, to only cite a few.
There is, however, a caveat. If interest rates rise too quickly, consumers might be less likely to take out loans, and banks would be negatively impacted by weak loan growth as economic activity slows down.
Insurers can also benefit from inflation for several reasons. On the one hand, they have the ability to pass the price increase on to their customers. Again, companies that can more easily pass costs on to customers tend to do better in inflationary environments.
Second, inflation drives higher interest rates, which benefits insurers who generate investment income from excess funds generated by underwriting policies. Two insurers that I like are Progressive and Allstate.
You can also reduce interest rate sensitive holdings, such as treasury bills, and hold a small allocation of gold or even cryptocurrencies as a way to hedge inflation. Gold can also be a great hedge, especially if inflation rises more than expected.
Higher inflation doesn’t mean you have to get too defensive with your portfolio. Too many investors lost money in the 2010s holding gold and other assets for inflation that never happened, and missed the huge rally in tech names.
Continue to hold your highfliers, but also allocate some of your capital to assets that benefit from inflation. It’s unclear whether inflation will stay high over the next year or so, so the best you can do is spread your risk wisely.
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.