With inflation rising, many of us feel the pinch of higher prices and dwindling purchasing power. One way to protect your money is by investing in inflation-resistant assets that can maintain their value despite rising inflation.
But what are the best investments during inflation? Check out our tips to help you take control of your finances.
What does inflation mean for your investments?
As inflation rises, money loses value — reducing the number of goods and services it can purchase. For example, let’s say you could buy 20 items on your grocery list with $100 a few months ago. Today, you might only be able to afford 12 things on the same grocery list due to higher prices. The same principle applies to your investment returns.
If your investments aren’t inflation-resistant, the value of your portfolio will gradually decrease over time. To preserve the value of your investments, consider investing in inflation-proof assets that tend to perform well even in an unstable economy.
What is an inflation hedge?
An inflation hedge is an investment that protects against the negative effects of inflation. In other words, these investments tend to do well even when inflation is high.
So, to maintain your portfolio’s purchasing power, consider seeking inflation hedges like precious metals, commodities, and real estate to safeguard against a shrinking dollar. For example, if your portfolio only consists of Tesla and Google stocks, adding inflation hedges like gold — whose prices aren’t directly tied to the inflation rate — may be wise.
Best inflation investments to protect your wealth
Need help figuring out where to park your money during an inflation surge? Here are some of the best inflation-proof investments to consider:
Gold tends to hold its value even during inflation. Why? Because the Fed can’t inject gold into the economy like they can with cash, which means gold’s value isn’t based on the central bank’s actions. Instead, gold’s value comes from its inherent scarcity and difficulty to mine.
Investing in gold can sometimes mean buying a physical block of gold and locking it away in your safe. But you can also invest in Gold exchange-traded funds (ETFs). According to a NASDAQ report, investors poured around $7.3 billion into SPDR Gold Shares (the largest gold-backed ETF by asset) in just three months to combat inflation.2
Real estate is traditionally used as a reliable hedge against inflation since property and rental values tend to increase as the price of goods and services rises.
Also, because the demand for homes and apartment rentals tends to remain constant regardless of economic conditions, owning real estate could provide investors a steady source of income.
Purchasing a property typically requires a substantial upfront investment and is most likely not an option if you’re on a tight budget. Don’t worry though: You can still invest in the real estate market with real estate investment trusts (REITs). You can buy them through an online brokerage account by purchasing shares of publicly traded REIT stocks or mutual funds and ETFs that invest in REITs.
REITs operate portfolios of residential, commercial, and industrial properties and pay 90% of their taxable income to shareholders annually as dividends. And they tend to outperform the S&P 500 despite high inflation, according to the National Association of Real Estate Investment Trusts.3
Besides precious metals, other commodities like agricultural goods and raw materials tend to perform well during inflation due to their inherent value.
In 2022, Invesco DB Commodity Index Tracking Fund (DBC) — the largest broad basket commodity ETF by assets — rose nearly 18%, while the S&P 500 declined by approximately 20%.4 So, if your investment portfolio doesn’t yet include any commodities, consider adding some to diversify your investments.
Though commodities are typically considered inflation hedges, some prices are more volatile than others. For example, global oil prices inflated to over $110 a barrel due to supply concerns because of the conflict between Ukraine and Russia. If you’re interested in investing in commodities, consider more stable ones like gold or base metals instead.
One of the most popular treasuries to invest in during inflation is treasury inflation-protected securities (TIPS). As the name suggests, they’re bonds issued by the U.S. government that offers protection against inflation. TIPS’s principal (face value) adjusts according to inflation levels. When it matures, you get either the adjusted or the original principal — whichever is greater.
You can purchase TIPS by opening an account through the U.S. Treasury at its TreasuryDirect site. You could also invest in them by buying ETFs or mutual funds that hold TIPS.
Another inflation-proof asset class worth looking into is Series I savings bonds (I bonds). With these bonds, you earn a fixed interest rate and a variable rate that changes with inflation and adjusts twice a year (in May and November). Like TIPS, you could purchase I bonds through the TreasuryDirect site.
Floating-rate bonds (FRBs) have an interest rate that is adjusted based on a predetermined formula.5 In other words, if inflation increases, the interest rate on your FRBs also increases.
Because the interest rates on floating-rate bonds adjust according to the market conditions, FRBs can help you avoid market price volatility during inflation since there’s less opportunity cost. In layperson’s terms: Your FRBs’ returns will keep pace with the rising costs of goods and services, unlike traditional fixed-rate bonds.
Tips for investing during inflationary times
With the right plan and strategy, you can protect your assets against inflation and maintain the purchasing power of your portfolio. Here are a few things to know before investing your hard-earned money:
- Diversify your portfolio: One way to protect yourself against volatility caused by inflation is diversifying your portfolio across multiple asset classes. This way, if one area takes a hit due to changes in market conditions, the rest of your investments can make up for the losses.
- Understand your risk tolerance: For investors looking to make money in an inflationary environment, understanding your risk tolerance is crucial. For example, prices for commodities like oil have fluctuated due to the political unrest in Russia and Ukraine. So if you’re a risk-averse investor, investing in oil may not be the best idea.
- Don’t panic: It’s easier said than done but try your best not to panic about your investments during rising inflation. Making hasty decisions could lead to significant losses if you’re not careful. Before impulsively changing your investment strategy, understand what’s happening in the markets and consider talking to a financial advisor to make an informed decision about allocating your funds.
What is an inflation-proof investment?
An inflation-proof investment is an investment that tends to maintain its value during inflationary times by growing with or faster than the inflation rate. Investing in inflation-resistant assets could protect your portfolio against devaluation over time and retain its buying power.
What are the most inflation-proof investments?
Some common anti-inflation investments include gold, real estate, treasury inflation-protected securities, and floating-rate bonds.
However, it’s important to note that no asset class can offer 100% protection against devaluation — even among the assets mentioned above. You should always research the market and consult a financial advisor before making investment decisions.
What happens to stocks during inflation?
Inflation can have a profound effect on the stock market and stock prices. When inflation rises, the cost of raw materials increases — meaning businesses must pay more to produce their products. At the same time, consumers’ purchasing power decreases as wages do not keep up with rising prices, leading to less revenue for companies.
These two factors combined affect investor confidence and inject uncertainty into the stock market — causing fluctuations in stock prices.
Invest wisely to hedge against inflation
Remember to perform your due diligence before investing in inflation hedge assets like REITs and floating-rate bonds. Research each asset class thoroughly and seek expert advice from a certified financial advisor if needed.
Once you feel confident in your inflation-era investments, find other ways to grow your income during inflation.