How can I evaluate my stock portfolio’s performance against inflation?

To evaluate your stock portfolio’s performance against inflation, compare your portfolio’s annual return with the inflation rate. If your portfolio grows at a higher rate than inflation, your investments maintain purchasing power. Key methods include analyzing real returns, dividend growth, inflation-protected assets, and adjusting asset allocation for long-term inflation resilience.

1. Calculate Real Returns

Real return is the actual return on your portfolio adjusted for inflation. If your investments earn 10% annually but inflation is 6%, your real return is only 4%.

• Formula: Real Return = Nominal Return - Inflation Rate
• Higher real returns: Ensure your portfolio consistently outperforms inflation.
• Diversification helps: Including inflation-resistant assets can improve real returns.

2. Compare Portfolio Growth with Inflation Rate

Your portfolio should consistently grow at a rate higher than inflation to preserve wealth.

• Monitor annual inflation: Compare it with your portfolio’s returns.
• Look at historical trends: Long-term performance matters more than short-term fluctuations.
• Rebalance if needed: Adjust allocations if inflation erodes returns.

3. Consider Dividend Growth Stocks

Dividend stocks that consistently increase payouts can help your portfolio beat inflation.

• Focus on strong companies: Firms with a history of increasing dividends outperform inflation.
• Reinvest dividends: This enhances long-term portfolio growth.
• Diversify sectors: Defensive sectors like FMCG and pharma offer steady dividends.

4. Invest in Inflation-Protected Assets

Certain assets perform well during inflation and can hedge against rising prices.

• Gold and commodities: These tend to rise when inflation is high.
• Real estate: Rental income and property values often keep pace with inflation.
• Government bonds: Inflation-linked bonds provide stable returns.

5. Conclusion

To evaluate your portfolio against inflation, focus on real returns, dividend growth, and inflation-protected assets. Ensure your investments consistently grow at a rate higher than inflation to maintain purchasing power and long-term financial security.