What can a financial advisor do to protect against risks associated with inflation?

The choice to suggest a diversified portfolio that includes inflation-hedging assets is a sound strategy for protecting against risks associated with inflation. Inflation can erode purchasing power over time, leading to decreased real returns on investments. By including assets that historically perform well during inflationary periods—such as real estate, commodities, or Treasury Inflation-Protected Securities (TIPS)—financial advisors can help clients maintain the value of their investments in real terms.

A diversified portfolio takes into account various asset classes, which can provide stability and growth potential even when inflation impacts certain sectors negatively. This approach not only helps mitigate risks but also aligns with the principle of not putting all eggs in one basket, thereby enhancing the likelihood of achieving the client's financial goals despite changing economic conditions.

In contrast, investing only in fixed income securities may expose investors to heightened risk during inflationary periods, as these bonds often yield lower returns that may not keep pace with rising prices. Suggesting clients withdraw from all investments would lead to missed opportunities for growth and could harm their long-term financial wellness. Avoiding discussions about inflation fails to address a significant economic factor that affects investment strategies and financial planning. Thus, the proposed strategy reinforces the importance of proactive financial management in response to inflation risks.