What to Invest in During Inflation

The thought of inflation rising can be scary as there are many aspects that can be affected. Not only does inflation increase uncertainty surrounding market conditions, there is also lots of uncertainty surrounding whether or not you will be able to keep up with your finances. 

Learn how to make thoughtful investments during periods of inflation to better protect your portfolio. Luckily, there are a variety of different investment vehicles that are said to withstand the effects of inflation and add a layer of protection. 

Read on to learn more about what investment vehicles are best during periods of inflation along with answers to some other commonly asked questions. 

What to Invest in During Inflation

When inflation hits, it is more important than ever to make strategic investments in wise asset classes. Below we will cover some of those wise asset classes that are known to withstand the effects of inflation. However, as with any investment, it is important to remember not to invest any money you aren’t prepared to lose.

1. Inflation-Indexed Bonds 

Inflation-indexed bonds (or inflation-linked bonds - ILB) are is a security tailored specifically to protect investors from inflation. Just as the name suggests, these bonds are indexed to inflation. This means that the principal and interest payments will move with the changes in the rate of inflation. 

A commonly used vehicle for ILBs are U.S. TIPS (treasury inflation-protected security). Unlike typical bonds, whose face value will often decrease as a result of increased inflation, the face value and interest payments of TIPS will rise with inflation. 

It is important to note though, that given the riskless nature of this security, TIPS will have a very low yield. This may make it less attractive to some investors, but if you are able to diversify your inflation hedges within your portfolio, TIPS are a good option to consider.

2. Commodities 

Commodities are another great security to invest in as a hedge for inflation. Typically you will see commodity prices rise as inflation does. 

Commodities are considered a ‘real asset’ and react in a different way to changing economic conditions compared to ‘financial assets’ like equity securities. If your portfolio is stock-heavy, consider investing in some commodities to help diversify your investments. 

Commodities are generally raw materials used in the production of other goods we use daily. As inflation rises the demand for goods and services also increases, which in turn increases the demand for commodities. This makes commodities more valuable as inflation increases, acting as a great tool for hedging against inflation. Generally, the most popular commodities to invest in in order to hedge inflation are oil, natural gas, wheat, corn, and precious metals. 

3. Real Estate 

Real estate investments are another known way that investors will protect themselves against the effects of inflation. This is based on the principle that you have a stream of income coming from an investment property. Tangible assets like real estate are a favorite amongst investors as they are more likely to withstand the test of time.  

As inflation changes, the income you generate from your investment properties will also change parallel to the movements of inflation. This is given that you are increasing rent prices as the property value changes with inflation, and your mortgage payments stay the same.

Furthermore as inflation increases, the prices of property increase as well. This means that if you have paid for a property using debt, your loan-to-value ratio will decrease and you will receive an organic discount by increasing your equity in the property. 

Overall, adding real estate to your portfolio is always a good way to diversify your investments. However, especially during times of inflation and uncertainty, real estate investments can pay off and provide you with financial stability. 

4. Precious Metals 

Precious metals are another type of commodity, however, it deserves their own subsection as gold may be one of the oldest methods of hedging against inflation. This is because the value of gold moves inversely with the purchasing power of a dollar. Basically, as inflation goes up (lowering the purchasing power of a dollar) the value of gold goes up with it. 

Gold is considered a ‘safe asset’ meaning that it is said to hold value during adverse economic conditions. Furthermore, because its supply is limited and it is a tangible investment, investors believe that gold is one of the safest investments one can make; often comparing gold to U.S. Treasury securities which are almost risk-less.

5. Stocks

Thinking long term, stocks generally offer the most upside potential; however with that great upside potential comes greater risks. If you want to take that risk and invest in stocks as your inflation hedge, consider investing in an index fund like the S&P 500 which is already well diversified in itself. As an example, the S&P 500 generally yields around 10% annually which is higher than the rate of inflation. As long as your rate of return on investment is higher than the rate of inflation, you should be in the clear. 

A plus side to using stocks as an inflation hedge is that unlike the other options on this list, stocks can be bought and sold much more easily. It is important to note though that not all stocks will perform well in an inflationary environment. Choose stocks in industries that do well during periods of inflation like energy, materials, finance, industrials, and others. Or even better, invest in index funds, mutual funds, or ETFs encompassing these industries to be naturally diversified.

See also: Best Inflation Stocks

Can You Make Money During Inflation?

There are many different investment opportunities to make money during periods of inflation. Before you begin investing though, be sure to pay off all debts and have an emergency fund set up. Furthermore, it is more important than ever, during turbulent times, to stick to a budget and continue saving. 

If you have room to invest in your budget, some of the best investments to make during periods of inflation are in precious metals, other commodities like oil and natural gas, and inflation-indexed bonds like TIPS. Other investments like real estate are also a great tool to protect yourself from the effects of inflation. Remember, as real estate values rise, you are making money on a future sale or in current rent pricing. At the same time, there are several variables that dictate how property values will shift. You must invest with care, but you can make money from inflation in the best of circumstances.

Read more: How to Prepare for Inflation

How to Invest With Reduced Buying Power

Don’t be discouraged from investing because of having reduced buying power. A great option for when you have less buying power is buying fractional shares of stocks or ETFs. During inflationary periods, stock from industries like energy, materials, finance, and industrials, typically perform well. Another good option would be investing in REITs or real estate investment trusts. This way even if you can’t afford to have your own investment property, you will still be able to gain from the real estate market benefits from inflation.

Frequently Asked Questions