9 Tips on How To Invest During High Inflation
Inflation is a major concern for investors. While a small amount of inflation can be good for the economy, as it encourages spending and investment, too much inflation can be devastating for investments. When inflation is high, the purchasing power of your investments decreases, and you may even lose money.
There are a few things you can do to protect your investments from inflation.
- First, diversify your investment portfolio. This means investing in different asset classes, such as stocks, bonds, and real estate. This will help ensure that your portfolio is not too heavily affected by any one economic condition.
- Second, stay up to date on economic conditions and inflation rates. This way, you can make adjustments to your investment strategy as needed. For example, if inflation is expected to rise, you may want to invest in assets that will appreciate in value, such as gold or real estate.
- Third, be patient and don’t make any rash decisions. When inflation is high, it can be tempting to sell all of your investments and move to cash. However, this is usually not the best idea. The market always has ups and downs, and if you sell when conditions are bad, you may miss out on the rebound when conditions improve. If you follow these tips, you can help protect your investments from the devastating effects of inflation.
Are you worried how inflation will affect your investments? By the end of this article, you will have a better understanding of:
- 9 tips on how to invest during high inflation
- What is Inflation And How Does Inflation Affect Investments?
- How can you protect your wealth and portfolio from inflation?
- What to buy before inflation hits, and the best investments for high inflation?
- what to invest in during inflation
- best sector to invest in during inflation
- worst investments during inflation
- Stick to a good financial plan with a diversified, balanced asset allocation. No one can beat inflation, but you can improve your investment returns.
- Invest in long term fixed debt!! Whether it is direct investments, municipal bonds, or a bond fund.
- Is cash king during during inflation? Many people instead use the term “Cash is Trash” during an inflationary environment.
- TIPS. Treasury Inflation Protected Securities. Highest credit quality, low level of risk, great hedge against inflation.
- U.S. Treasury Department’s I Bond – savings bonds performance tied to increased levels of cost of living, great inflation protection
- Shorter term bonds and “floating rate” (not fixed) bonds.
- Do not try to pick the perfect commodity.
- “Consumer defensive stocks” that perform well in a rise in inflation and rising levels of commodity prices.
- Look at investing in raw land or in Real Estate Investment Trusts (REIT).
And a bonus tip – Ask for a raise at work to keep pace with inflation expectations!!
Imagine this scenario. You skip two long weekend trips each year for the next three years. A total of six trips. Instead, you invest the money. Ten years from now, your investments have grown. You decide to sell your investments to go on some vacations.
Due to decreased purchasing power, you can only afford three to four vacations. You saved your money, the investments grew. But not as fast as the cost of living. That is the horrible effect of inflation on investing. You have gone backwards.
What is Inflation And How Does Inflation Affect Investments?
Inflation is the rate at which the prices of goods and services in an economy increase over time. The effects of inflation can be both positive and negative.
On the one hand, inflation can lead to higher economic growth and improved living standards. On the other hand, it can lead to higher interest rates, lower investment returns, and decreased purchasing power. Inflation can have a number of different effects on investments.
For example, it can lead to higher interest rates and lower investment returns. Inflation can also affect the prices of different asset classes, commodities, and economic growth. All of these factors must be considered when making investment decisions.
In general, inflation is one of many factors that can affect investments. It is important to consider all of the factors that may affect your investment strategy and portfolio.
How Can You Protect Your Wealth and Portfolio From Inflation?
What are three ways you can protect yourself from the effects of inflation? There are a number of ways that you can protect your wealth and portfolio from inflation.
- One way is to invest in assets that have the potential to appreciate in value at a rate that is higher than the rate of inflation.
- Another way is to invest in assets that generate income, such as bonds, that is not affected by inflation.
- Finally, you can diversify your investment portfolio across a number of different asset classes, which will help to protect your wealth from the effects of inflation.
There are many ways that you can protect your wealth and portfolio from inflation.
One way is to diversify your investments. This means investing in a variety of assets, including stocks, bonds, and real estate. This will help to ensure that your portfolio is not too heavily invested in one particular asset, and will help to protect you from inflation.
Another way to protect your wealth from inflation is to invest in assets that are likely to increase in value over time. For example, investing in real estate can be a good way to hedge against inflation, as property values tend to increase over time. Collectibles and precious metals can also be good investments, as their values can increase with inflation.
Finally, you can protect your wealth by creating a budget and sticking to it. This will help you to ensure that you are not spending more than you can afford, and will help you to save for the future. By being mindful of your spending and saving habits, you can help to protect your wealth from the effects of inflation.
Which Investments do Poorly During Inflation?
Bonds, Income and their Performance
Just like the TV show – bonds can be considered “The Biggest Losers”. Fixed income in general will do poorly during inflation. Why? Because expenses are rising. And the income is not rising with it. The income is fixed.
Cash, any loans at a fixed rate (like a mortgage), bonds, or any fixed income. Rising cost of living hurts them all. An example would be a pension, without a cost of living adjustment.
For example, you have $1,000,000 in bonds. And you are earning 3%, or $30,000. And you are meeting all of your expenses.
- Your grocery bill has gone up $40 a week. That’s $2,000 a year.
- It costs you an extra $20 a week to fill up your car. That’s another $1,000 a year.
- You like to eat out. That’s gone up an extra $2,000 per year for you too.
Just those items alone – your expenses went up from $30,000 per year to $35,000. You are now short $5,000 a year. But your income remains at $30,000 per year. Would you buy a $1,000,000 portfolio that only produces $30,000 per year now? No, you would pay less for it – it would have to go down in value for it to be worth it as an investment.
Stocks, Growth and Investment Portfolio
Stocks are a difficult one to answer. That is because the answer is “depends”. It depends when you bought the stocks, looking at the history of other similar time periods. Inflation puts pressure on an economy, but also typically raises the value of assets. A real ying and yang on stocks and their prices. Increased cost of living does put pressure on stock prices.
So what is the bottom line as a guide? If you bought stocks right before an inflationary period. But did so when stocks were undervalued or cheap – you historically did well. If you bought the stocks before a correction, or when they were overvalued – you didn’t do as well historically. I know it sounds too basic, but looking at the previous comparable time periods – that is really the best correlation.
Which investments do good during Inflation?
Commodities, Inflation Rates, and Reccesions
Commodities are historically not very good investments. Except, during inflation. Traditionally commodities do well during increased cost of living. Look at the price of gas and oil in 2021 and 2022.
If you want a really in depth view on inflation and investing – I can’t suggest enough this article at Seeking Alpha: Investing With Inflation: 150 Years Of Data
Isn’t Real Estate a great inflationary hedge?
The key is if you bought the real estate with a low fixed rate mortgage. Remember earlier with fixed income? Well, a fixed rate mortgage is really bad for the bank, and great for you. The mortgage loan you have gets devalued with inflation!
For example – if you owe $500,000 to the bank. And cost of living increases 100% next year. The value of your loan has shrunk. In half. To $250,000. That’s how inflation works.
On the other hand. as I mentioned earlier. During inflation, assets typically go up in value. So home prices traditionally would rise during these periods. A counter balance is that when interest rates go up, that puts pressure on home prices. So perhaps the real asset of land may be the better hedge? The key takeaway is that a low fixed rate mortgage is a great hedge on inflation.
I BONDS, I BONDS, I BONDS!!!! Read more here
If you are worried about the increased cost of living – I would suggest you take a minute and play with a few calculators.
- This calculator will help you see how much something used to cost, versus what it would cost today.
- Another calculator will help you play around with past and future cost of living affects. Based on your own assumptions.
If you are more of a visual learner, this great calculator will help you visualize previous similar situations
Best Sectors to Invest in During Inflation
As the cost of living continues to rise, many people are finding it difficult to keep up with the increasing prices. One of the main areas that people are struggling with is housing. The burden of housing costs is becoming too much for many people to handle, and as a result, they are finding it difficult to afford housing.
There are a number of factors that contribute to the high cost of housing, and one of the main problems is the lack of affordable housing supply. There are a number of barriers that prevent people from accessing affordable housing.
One of the main problems is the lack of available affordable housing units. There is a severe shortage of affordable housing units, and as a result, developers are often unwilling to build new units. Another barrier is the lack of funding for affordable housing. Developers often need a large amount of money to build new units, and without sufficient funding, they are unable to do so.
There are a number of ways to address the problem of affordable housing. One solution is to increase the supply of affordable housing units. This can be done by providing incentives for developers to build new units, or by increasing funding for affordable housing. Another solution is to reduce the demand for housing. This can be done by providing subsidies for people to live in less expensive areas, or by increasing the availability of public housing. The issue of affordable housing is a complex one, and there is no easy solution.
During a period of high inflation – this is perhaps one of the best sectors for investment opportunities.
Effect of Inflation on Your Investments
Do you remember the example of the $1,000,000 bond portfolio earlier? Example of a $1mm bond portfolio at 3%. That means the portfolio is earning you $30k a year. And that covers your bills. But, now it starts to creep in.
What do you think happens to the value of your portfolio? Would someone pay you $1,000,000 for it? Of course not. They need $35,000 of income from that million dollars, just like you do. They need to earn 3.5%, or $35,000, from their portfolio. I’ll give you a hint. You would probably have to sell that portfolio for about $850,000. That’s how much less valuable it is.
Lessons from the 70’s
Since our current situation doesn’t look very different, let’s look back at the lessons from the 1970’s. We were coming out of a prolonged war overseas (vietnam vs Afghanistan). The annual deficit has been increasing due to tax cuts and spending packages.
Now, it is important to understand when stocks did worst in the 1970’s. Not when inflation peaked – but prior. The start of the 1970’s saw it climb from 3% to 6% to 11% by 1974. By then, the stock market was down by about 40%. Inflation didn’t peak until several years later. In 1980, it was about 13.5%. At that point, the stock market had already more than just rebounded. The gains were not enough. The cost of living outpaced the growth of a portfolio.
Wow, so inflation sure looks grim
Unfortunately, yes. It’s been nearly 50 years since we have had to deal with it in America. And unfortunately, there is no easy answer on how to invest during inflation. Think of it as a heavy tax we all have to pay.
Are you willing to borrow a TON of money? Buy massive amounts of land? Live on a farm and be self-sufficient, like the Amish? If you are, that’s great!! Because you are really nailing all of the greatest hedges against inflation. If not –
CONCLUSION – 10 Tips to beat inflation
SO WHAT DO I DO?
*First, understand this is purely for educational purposes, and NOT investment advice. Only you can decide what constitutes a good investment for you and fits your risk tolerance.
- Stick to a good financial plan. With a diversified asset allocation calculator. That is tied to your financial goals. And rebalance your portfolio frequently. If you have a long term investment time frame – ignore the noise. Inflation is part of the ups and downs you should have been prepared for. No one. And I mean NO ONE knows how to trade versus inflation.
- The best thing to invest in during inflation? Probably is debt!! Do not pay off low interest loans, especially fixed rate loans. As mentioned earlier in the real estate and bonds sections – low fixed rate loans are great for the borrower during high inflation. This is due to the fact that the loans are being devalued.
- What is the worst place to keep your money during inflation? “Cash is Trash”. During inflation, your cash is literally losing purchasing power. Every single day.
- TIPS. Yep. One of the first tips is to look into “TIPS”. Treasury Inflation protected Securities.
- Another alternative is the Treasury Department’s I Bond, These are savings bonds tied to the inflation rate. The current rate through April 2022 is 7.12%. With interest rates on checking and savings accounts near zero, this is an alternative worth looking into. Each year you can invest up to $10,000 into I Bonds each year.
- Shorter term bonds and “floating rate” (not fixed) bonds may become more appealing to your portfolio during inflation.
- Do not try to pick the perfect commodity. Commodities can be very volatile. Instead, consider investing a small percentage of your portfolio in a diversified commodities holding.
- Look for companies that when they increase their prices, it will have less of an effect on them. “Consumer defensive stocks”. The reasoning is their cash flows are more sustainable . People still will buy X even if it costs 10% more. A few companies that may fall into that category are Apple and Amazon. Amazon recently (link) increased the price of Amazon Prime. If history is an indicator, people will not cancel it – they value it too much. The same is with Apple products. People see Apple products as high quality and worth the premium prices (study link). There are dozens of companies like this. These are just two examples, in my opinion – though of course I could be wrong about them.
- How can I invest in Real Estate. Some people like to buy land during inflationary periods. Others prefer to invest in a REIT. A REIT is like investing in a company that owns properties and will pay you a dividend. A REIT can invest in office space, retail space, and residential homes. Or a combination. Do not invest in anything you do not fully understand or are comfortable with.
- Ask for a raise at work. It is the perfect storm for a pay raise right now. There are nearly two jobs available for every unemployed American right now. If you can’t get a pay raise, start shopping for a new job and find out what other companies value you. You may be very surprised what another company will offer you.
More than ever, diversify your portfolio. How many studies do you need to read about it? Diversification and rebalancing are always the keys to your portfolio’s success? Not timing the market. Not being smarter than everyone else.
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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.
*It is very important to understand: I am not a licensed financial advisor nor stock broker. I am in no way shape or form giving any investment advice. Nor suggesting any specific investment. I do not hold any of the above mentioned companies directly nor intend to add any holdings in the next few days. Never take legal, tax or investment advice from a blog!!!