Inflation rose at a rate not seen in over 40 years. With inflation on the rise, you may be wondering how best to protect your portfolio from the inevitable effects of inflation.
Below, we’ll cover some of the best investments you can make during times of inflation to add a layer of protection and help maximize your portfolio during tough times.
The best investments to make during inflation
Here are some investment ideas to consider during times of inflation. These are all great ideas individually, but together you can build a strong, well-diversified portfolio. Remember, however, never to invest money that you are not prepared to lose, as things could get worse at any time.
Having real estate investments is a great idea to have in your portfolio, regardless of economic conditions. Typically, during times of economic uncertainty and especially during times of inflation, investors favor tangible assets because they are more likely to hold their value and stand the test of time. Real estate is a perfect example.
With real estate investments, you will often earn passive income from them. Luckily for property investors, rising inflation tends to increase property values, which means you can also increase rental prices. If your mortgage payments stay the same but you raise the price of rent, you will see yourself making more money on your investment during times of inflation than under normal economic conditions!
Also, as the value of the property increases and your mortgage remains the same, your equity in the property will increase. Thus, lowering your loan to value ratio and giving you a natural discount.
Commodities are another recommendation from investment professionals to hedge against the effects of inflation. Normally, as inflation rises, the price of commodities also rises. Commodities are generally raw materials used in the manufacture of other goods and services. We find that as inflation increases, the demand for goods and services as a whole also increases. This in turn increases the demand and value of commodities.
Commodities are classified as “real assets”. Real assets react inversely to “financial assets” like equity securities, to the effects of economic conditions. If your portfolio is heavily invested in equity securities, such as stocks, consider investing in commodities to help diversify your investments.
Inflation-linked bonds are one of the most obvious investments to make to help hedge against inflation. As the name suggests, these are bonds whose principal and interest rates are correlated to the rate of inflation. So unlike your typical bonds which lose value when inflation rises, inflation-linked bonds will see an increase in face value and interest payments.
Most often, you’ll see investors turn to TIPS (Treasury Inflation Protected Securities), a type of inflation-linked bond. It is important to note however that given the low risk nature of this security, TIPS are generally more expensive than traditional bonds and may lose value if inflation is not as high as expected. Moreover, because this investment is so low risk, it also has a very low return.
Even though it was just mentioned that equity securities are more risky in times of inflation, there are a few industries that tend to outperform others. For example, stocks in the energy, oil and emerging markets sectors. Index funds like the S&P 500 are also a good option for investors looking to invest in stocks, as they are already well-diversified on their own and can generally generate a fairly healthy return. For example, the S&P 500 returns about 10% per year, which is higher than the rate of inflation.
When considering using stocks as an inflation hedge, it’s best to think long term. Stocks generally have the highest upside potential over the long term, but with greater upside potential comes greater risk. However, one advantage of stocks is that unlike some of the other options on this list, it is much easier and faster to buy and sell. It is also more accessible than the other options. A great option for those working with less purchasing power is to buy fractional stocks or ETFs. Remember, however, that not all stocks react to the effects of inflation in the same way. Choose stocks from the energy, materials, financials or industrials sectors.
Investing in precious metals is another tangible asset that professionals like to invest in to help protect their finances against the effects of inflation. Specifically, gold is a favorite among many. This is because the value of gold moves inversely to the purchasing power of a dollar. This means that as inflation increases, the value of gold and other precious metals also increases. Precious metals are also a type of commodity that, on the whole, do well during times of inflation.
Gold is considered a “safe asset”. Safe assets are known to retain their value in adverse economic conditions and their supply is limited. Due to this limited supply and the fact that it is a tangible asset, investors have long favored gold as a good way to hedge against economic downturns.
See also: What to invest in during inflation
How to adjust your portfolio for inflation
Inflation is accelerating and you may be wondering how best to adjust your portfolio. Fortunately, there are plenty of investment options to help mitigate the effects of inflation on your portfolio.
Start by reassessing your current holdings and adjusting them to better suit an inflation-driven market. This can be done by adding investments in commodities, energy or oil stocks and TIPS.
What is the impact of inflation on your purchasing power?
As inflation increases, your purchasing power decreases. Inflation increases the cost of consumer goods and services, which means that you will then have to pay more for the same goods and services that you used to buy. Overall, as inflation rises, your money will begin to be worth less.
Can your portfolio grow with inflation?
Inflation causes many disturbances, including disturbances to your portfolio. However, that doesn’t mean your portfolio can’t grow with inflation. If you can make the right inflation-friendly investment decisions, you’ll see your portfolio grow. Some examples include investments in real estate and precious metals.
Frequently Asked Questions
What stocks do well during inflation?
What stocks do well during inflation?
Stocks in the energy, industrials, financials and emerging markets sectors tend to perform well during inflation.
How to profit from inflation?
How to profit from inflation?
To take advantage of inflation, you need to invest in inflation-friendly stocks like commodities and some stocks.