Inflation has been increasing at a rate not seen in over 40 years. With inflation on the rise, you may be wondering how to best protect your portfolio from the unavoidable effects that come with inflation.
Below we will cover some of the best investments you can make during periods of inflation to add a layer of protection and help maximize your portfolio during strenuous times.
The Best Investments to Make During Inflation
Here are some investment ideas to consider during inflationary periods. These are all good ideas individually, but together, you can build a strong and well-diversified portfolio. Remember though to never invest money that you aren’t prepared to lose, as things can take a turn for the worst at any moment.
Real Estate
Having real estate investments is a great idea to have in your portfolio no matter the economic conditions. Generally, during times of economic uncertainty and especially during inflationary periods, investors favor tangible assets as they are more likely to hold value and stand the test of time. Real estate is a prime example of this.
With real estate investments, you will often be making passive income through them. Luckily for real estate investors, increased inflation tends to raise property values, meaning you can raise rental prices as well. If your mortgage payments stay the same but you increase the price of rent, you will see yourself making more money on your investment during periods of inflation than during normal economic conditions!
Furthermore, as the property value increases and your mortgage stays the same, your equity in the property will increase. Thus, lowering your loan to value ratio and giving you a natural discount. Plus, you can invest in crowdfunding platforms that will help you buy in at a much lower price, making it easier for you to get into the sector without buying properties yourself—you can let larger platforms do the heavy lifting.
Commodities
Commodities are another investment professionals recommend to help hedge against the effects of inflation. Normally, as inflation rises so does the price of commodities. Commodities are generally raw materials that are used in the manufacturing of other goods and services. We see that as inflation rises, so does the demand for goods and services as a whole. This in turn raises the demand and value of commodities.
Commodities are classified as ‘real assets’. Real assets react in an inverse way to ‘financial assets’ like equity securities, to effects in economic conditions. If your portfolio is heavily invested in equity securities, like stocks, consider investing in commodities to help diversify your investments.
Inflation-Indexed Bonds
Inflation-indexed bonds are one of the most obvious investments to make to help hedge against inflation. As the name states, these are bonds whose principal and interest rates are correlated with the rate of inflation. So unlike your typical bonds that lose value when inflation increases, inflation-indexed bonds will see an increase in face value and interest payments.
Most commonly, you will see investors turn to TIPS (treasury inflation-protected securities), a type of inflation-indexed bond. It is important to note though that given the lower risk nature of this security, TIPS are typically more expensive than traditional bonds and may lose value if inflation is not as high as expected. Furthermore, because this investment is so low risk it also has a very low yield.
Stocks
Although it was just mentioned how equity securities are riskier during periods of inflation, there are a few industries that tend to outperform the others. For example, stocks in the energy, oil, and emerging markets industries. Index funds like the S&P 500 are also a good option for investors wanting to invest in equities as it is already well diversified in themselves and can generally yield a pretty healthy return. For example, the S&P 500 yields around 10% annually which is higher than the rate of inflation.
When thinking about using stocks as a hedge for inflation, it is better to think long-term. Stocks generally have the most upside potential long term, but with this greater upside potential comes greater risk. A benefit of stocks though, is that unlike some of the other options on this list, it is much easier and quicker to buy and sell. It is also more attainable than the other options. A great option for those working with less buying power is to buy fractional shares of a stock or ETF. Remember though that not all stocks react in the same way to the effects of inflation. Choose securities from the energy, materials, finance, or industrial industries.
Precious Metals
Investing in precious metals is another tangible asset that professionals like to invest in to help protect their finances from feeling the effects of inflation. Specifically, gold is a favorite amongst many. This is because the value of gold moves inversely with the buying power of a dollar. This means that as inflation increases, so does the value of gold and other precious metals. Precious metals are also a type of commodity, that as a whole does well during inflationary periods.
Gold is considered to be a ‘safe asset’. Safe assets are known to hold their value during adverse economic conditions and have limited supply. Due to this limited supply and the fact that it is a tangible asset, investors have long favored gold as a good way to protect yourself from economic downturns.
See also: What to Invest in During Inflation
How to Adjust Your Portfolio for Inflation
Inflation is ramping up and you may be wondering how to best adjust your portfolio. Luckily, there are many investment options available to help diminish the effects of inflation on your portfolio.
Start by reevaluating your current holdings and adjusting them to be more suitable for an inflation-induced market. This can be done by adding investments in commodities, energy or oil stocks, and TIPS.
How Does Inflation Impact Your Buying Power?
As inflation increases, your buying power will decrease. Inflation raises the cost of consumer goods and services, meaning you will then have to pay more for the same goods and services you are used to buying. All in all, as inflation rises your money will begin to be worth less.
Can Your Portfolio Grow With Inflation?
Inflation causes many disruptions, including disruptions to your portfolio. However, this doesn’t mean that your portfolio can’t grow with inflation. If you can make the right investment decisions that are favorable to inflation, you will see your portfolio grow. Some examples include investments in real estate and precious metals.
Frequently Asked Questions
What stocks do well during inflation?
Stocks within the energy, industrial, financial, and emerging markets sector tend to perform well during inflation.
How do you profit from inflation?
To profit from inflation you must make investments in inflation favorable securities like commodities and certain stocks.