We invest for returns and survive in uncertain times like this. Only one source of income for the household will not be enough. So people tend to go for some passive income sources. For example, putting their excess money in some savings, etc., or if they have any property at their disposal, they may even let it go for this additional financial gain.
And now, with the high inflation anxiety due to the vast liquidity driven by the global central banks worldwide, we are going to beat inflation.
On November 10, the Labor and Social Security Department’s (BLS) Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 7.7% over the past 12 months. That was 0.50% lower than September’s 8.2% level but still 2% above the Fed’s target level.
Inflation creates unique challenges for investors. Even though your investments increase in value, inflation still reduces that value on the back end. The only way to do this successfully is to ensure that your money is in investments that will benefit from inflation while also avoiding those particularly prone to be struck.
So how do you find investments that benefit from inflation instead of losing value? Here are eight inflation-proof investments to consider:
8 Investments options to beat inflation
The rapid recovery of economic activity from pre-coronavirus-crash levels – combined with trillions of dollars in government stimulus – created the perfect storm of accelerating inflation.
There are no guarantees when it comes to investing in inflation. At best, certain investments can be inflation-safe, but returns can never be guaranteed. However, any combination of asset classes can be a winning strategy.
One significant inflation investing strategy you can take advantage of in 2022 is investing in I Bonds. These US savings bonds earn interest based on fixed and inflation rates. The result is a virtually risk-free investment backed by the US government and a great way to protect your wealth from inflation.
I Bonds currently pays 9.62%. You can buy these bonds at this price until October 2022. This price also applies for six months after making your purchase. So if you believe I Bonds on June 1, 2022, the 9.62% rate applies until December 31, 2022.
I Bond interest complexes semiannually. To note, you can only buy $10,000 of I Bonds annually. You cannot buy them through your online broker. Instead, it would be best if you visited TreasuryDirect.gov. The minimum purchase amount is $25.
Your I Bonds earn interest for 30 years unless you cash in first. But these gardens should be kept for at least one year. You lose the previous three months’ interest if you pay before five years. But even taking that loss at 9.62% was probably worth it. Of course, that’s better than just putting your money in a high-yield savings account.
Also note that the variable inflation rate is calculated twice a year, which depends on changes in the Consumer Price Index. But with inflation currently high, I Bonds are certainly one of the safest and best places to put your money during inflation.
2. Keep Cash in money market funds
Another popular way to invest during inflation is to park your spare Cash in a money market account (MMA).
There are two reasons why this is true:
- Money market accounts fluctuate continuously with interest rates and automatically adjust upward as interest rates rise—no need to chase higher-yielding cash-type investments.
- As the general market and money market interest rates rise, you won’t have to face the loss of market value that plagues fixed-price investments during inflation.
When adjusted for inflation, money market funds are interest-bearing investments. This is where your Cash should be parked.
Currently, the highest MMA rates can be found at banks like Ally and CIT Bank. Ally charges 1.15% on all balance rates and has no monthly maintenance fees or minimum balance requirements. As for CIT currently pays 1.55% APY, has a low $100 minimum deposit requirement, and has no monthly payments.
This strategy still means technically losing money to inflation. But it’s still better than putting your money in a checking or savings account that earns no interest.
3. Real estate property
Over the long term, the property is also usually an excellent investment response to inflation. Real estate is an extremely tough asset and often sees its most significant appreciation during periods of high inflation. This is especially true because as rents rise, people become more interested in owning to get the tax benefits that help offset the general level of inflation.
And you don’t need to be a landlord to invest in this asset class. Real estate crowdfunding sites allow you to invest in profitable real estate, some of which require as little as $10 to get started.
We like options like Fundraise because it pays a quarterly dividend and only pays 1% in annual management fees. But you can diversify part of your portfolio in property with these companies to help hedge against inflation.
Alternatively, you can invest directly in individual properties using a platform such as Roofstock. But you can also invest in REITs like Equity Residential (EQR) trusts. This trust has more than 300 large apartment complexes. Primarily in high-value markets such as New York, Boston, San Francisco, Southern California, Washington, and Seattle.
However, the property should be included in your portfolio if you expect inflation to rise.
4. Stay away from long-term fixed-income investments
Long-term, fixed-rate investments are the worst investments to put money into during an inflationary period. These can include any interest-rate debt instruments that pay fixed interest rates, especially those with a maturity of 10 years or more.
The problem with long-term fixed-income investments is that when interest rates rise, the value of the underlying security falls as investors flee the security in favor of higher-yielding alternatives.
Paying 3%, this 30-year loan can depreciate by up to 40% if interest rates on newly issued 30-year bonds rise to 5%.
Long-term fixed-income investments are great when inflation and interest rates are low. But suppose you believe inflation is on the way out. In that case, you may be better off moving your money out of long-term fixed-income investments and into shorter-term alternatives, particularly money market funds.
5. To pay special attention to the increase in capital investments
Many investors try to balance their account portfolios by investing in high dividend-paying stocks or growth and income funds. This can work exceptionally well during periods of price stability. But if inflation accelerates, it can hurt your investment returns.
That’s partly because high-dividend-paying stocks are as vulnerable to rising inflation as long-term bonds.
A better alternative is to invest primarily in growth stocks and funds. You should also highlight sectors that are likely to benefit from inflation. These may include:
- Construction materials
Since all prices will likely rise with inflation, they will likely outperform other account sectors.
You can invest in these sectors through an ETF fund or buy specific stocks with growth potential. For example, you can invest in energy stocks through the S&P Oil & Gas Exploration & Production ETF (XOP) or Vanguard’s Health Care Index Fund (VHT). Once you have determined what you want, you can buy it through broker E*TRADE.
Although there is no precise relationship between the price level and commodities, certain hard assets have traditionally outperformed inflation. Precious metals, especially gold and silver, immediately came to mind. You can hold precious metals directly with coins or bullion bars, but you can also invest indirectly through ETFs with actual gold.
You can also invest in gold mining stocks or funds consisting of these stocks. But these are stocks, not the metal itself. They tend to be highly volatile, even when gold prices rise.
There will likely be more predictable storage energy stocks and funds on the fund side. This is especially important because rising energy prices are often one of the main drivers in an inflationary environment.
If you are interested in investing in commodities, we recommend opening a brokerage account with one of our top-rated brokers. Once your account is opened, you can trade mutual funds, options, or ETFs directly through most full-service brokerage firms.
7. Consider other alternative asset classes
If you’re still wondering what to invest in during periods of high inflation, you can explore alternative asset classes. It can also be a wise move during down markets, as many alternative investments are not correlated strongly or at all with the general needs.
Examples of popular alternative asset classes and how to invest in them include:
- Investing in artwork with companies like Masterworks
- Investing in wine with platforms like Vint and Vinovest
- Lending to small businesses with companies like Mainvest
- Invest in farmland through REITs or crowdfunding sites like AcreTrader and FarmTogether
- Real livestock investment with Agridime
You can also explore alternative investment platforms such as YieldStreet, which offers a range of funds and individual contracts that you can invest for as little as $2,500.
Remember that some of these platforms require you to be an accredited investor, and the minimum investment requirements may be higher. But alternative assets are worth considering if you want to diversify your portfolio and potentially protect your wealth from inflation.
8. Convert adjustable-rate debt to a fixed rate
Technically, this isn’t an investment move, but it could be one of the most profitable strategies to respond to rising inflation.
Periods of low or falling inflation tend to favor adjusted rates over fixed rates when borrowing. But when inflation increases, the dynamic is reversed. High inflation leads to high-interest rates. Your adjustable interest rate will increase if inflation accelerates, even to a non-permanent level.
If you believe inflation is coming, you should start paying down your adjustable-rate debt to fixed rates. This should include credit cards, home equity lines, and especially your first mortgage if it’s an ARM.
Talk to your loan provider to find out what options are available. It’s also a good idea to check the papers on your loan to see when your rates will increase so you can plan. If you are refinancing your mortgage, try to reduce the repayment period and try not to reset your 30-year mortgage. You’ll pay less interest if your monthly payments stay the same or higher.
As the Federal Reserve eases monetary policy and begins to raise interest rates, we hope that the inflation rate will eventually recover and begin to decline.
But it will take time. Now it is essential to re-design it. Adding just a few investments that tend to perform well in the face of inflation can help your portfolio survive and thrive in this era of runaway inflation.