One hot topic in the world of investing is inflation. While inflation is a necessary evil, it does present challenges for investors. As the cost of living increases, returns don’t go as far, which can be challenging for retirees who rely on these profits to pay for those living expenses.
Younger people, however, still have their paychecks, and high inflation leads to higher wages.
Unfortunately, we don’t know if rising prices will continue or are just the result of the pandemic coming to an end. The good news is that even if costs increase at a steady rate, stocks usually beat inflation in the long run. Luckily, there are ways investors who can protect themselves from inflation and continue to thrive.
Why Would Inflation Pick Up?
Inflation is a possibility now that many businesses have reopened, and the US economy is finally getting back on track. During the pandemic, many businesses reduced staff or shut down, but those businesses are bringing their staff back and reopening, which could cause a drastic change and increase inflation.
Avoid These Investments When Inflation Picks Up
When inflation surges, there are a few investments you should avoid at all costs because they are known to be negatively impacted by inflation. These include:
Long term bonds & Certificates of deposits
Interest rates are expected to increase, so try not to tie your money up in long-term bonds or certificates of deposits. While it’s good to have a portfolio that consists of variety, focusing solely on these investments can lead you to miss out on higher rates later on. Instead, focus on short-term bonds and avoid any long-term investments.
Companies with higher-than-normal expected earnings, or growth stocks, tend to perform worse during inflation because they expect to earn most of their revenue in the future. As inflation continues to increase, future cash flows will be worth less.
Investments to Take Advantage of During Inflation
If inflation does surge, several assets can help provide you with a winning portfolio, including:
While long-term bonds are best to be avoided during inflation, short-term bonds can help you keep your money safe and accessible. If inflation leads to higher interest rates, these bonds are typically more resilient.
While it’s true that stocks may suffer for a short period when inflation surges, they are a good long-term investment against inflation. Stocks are very easy to invest in for newcomers. All you need to do is open an account with a brokerage or a trading platform and select an online broker.
As you continue to invest, keep in mind you shouldn’t make drastic changes to your portfolio that can hinder its performance if and when inflation drops. Instead, diversify your portfolio with investment ideas that can work during rising and stable inflation.
Real estate investments typically perform well during periods of inflation because property prices increase. Landlords can charge tenants more for rent, which will increase their investment on pace with inflation. Homeownership can also be beneficial during inflation because it means you can sell your house for more than you could have before, allowing you to rake in more money.
When it comes to offices and retail spaces, however, be cautious. The post-covid world is seeing a shift from working in-office to remote workplaces, so commercial real estate might not be the best investment until we see how many companies are going back to the office.
Treasury Inflation-Protected Securities (TIPS)
TIPS carries the same type of risk as other fixed-income investments, but they have an adjusted principal amount if inflation surges. TIPS are government bonds that go up or down depending on inflation. When inflation increases, the interest rate paid increases.
These bonds pay interest twice a year at a fixed rate, so they’re easy to measure and pay taxes with tax software. TIPS can help balance a fixed income or bond portfolio. They’re also backed by the federal government, making them one of the safest investments, especially through inflation.
Cryptocurrency also makes a good investment during times of inflation because it is not impacted by the value of cash. However, crypto can be volatile, so it’s best to remain focused on other types of investments and keep crypto as a small portion of your portfolio. Crypto, such as bitcoin, can protect against inflation because of its limited supply, but there is no way of knowing what the future holds.
Some commodities have been shown to do well during inflation, including silver and gold. You can invest in gold with coins or bars, along with ETFs that hold gold. Investors may also choose to add gold mining stocks to their portfolios.
Commodities include gold, grain, precious metals, electricity, oil, beef, natural gas, and more. Typically, commodities are an indicator of inflation when prices begin to rise. As the price of commodities rise, the price of products that utilize the commodity rise as well.
Investors can invest in commodities broadly through EFTs. However, before investing, be aware they can be volatile; caution is advised because commodities themselves depend on supply and demand. A change in either supply or demand can affect the prices of the commodities and the investment itself.
Preparing Your Portfolio
There are no guarantees when it comes to how inflation will affect your portfolio. Preparing for inflation can be difficult even for the most seasoned investors. The pandemic has made stocks falter and investment portfolios fall apart, with an impact on the global economy. Inflation will likely increase as we try to get our economy back on track.
The low rates you’re experiencing right now could quickly change, which will raise your cost of living by raising the cost of commodities. While there’s no way to truly know whether inflation is coming, it’s always a safe bet to prepare yourself for it. Start preparing your portfolio now so you can have the biggest returns.