What are the best inflation investments? It’s understandable to want to be insulated now that inflation has hit a 40-year high. Is there room for anxiety and pessimism? Sure. However, I find that it’s always important to search for that silver lining when things are getting topsy-turvy in the market.
While other people are panicking about inflation, you could be smartly pivoting to asset classes that protect against inflation.
Unlike past eras of inflation, this particular shift in purchasing power and prices for goods and services arrives at a time when the average person has more access to financial and investing vehicles than ever before.
You can accomplish using an app what a person during inflation in the 1970s or 1980s could only do by getting on the phone with a broker who shuffled some papers to earn a commission. This is precisely why I want to cover some highly accessible personal finance options for inflationary environments to help you determine the best channels for investment during inflation to remain safe.
1. Short-Term Bonds
Many people overlook short-term bonds because this doesn’t feel like an exotic option. However, the strength of this option is that you’re keeping your money both safe and accessible. Having that money within reach can be important amid rising prices in the consumer price index. Short-term bonds also tend to be more resilient compared to long-term bonds when interest rates rise. In addition, this option gives you the choice to reinvest for higher interest rates once your bonds mature.
2. Treasury Inflation-Protected Securities (TIPS)
TIPS are actually inflation busters by design. Sold by the U.S. Treasury, TIPS have their par values adjusted each year specifically to keep up with inflation. The end result is boosted interest payments for the investor with a highly likelihood of appreciation.
The thing to watch out for with TIPS is that you can’t let your expectations equate preservation of purchasing power with guaranteed growth. While you’ll never receive less than your original par value once TIPS mature, it’s still possible for TIPS value to decrease during your interest payouts. The TIPS three-year daily total return is 5.43%.
3. Real Estate Investment Trusts (REITs)
If the thought of personally investing in real estate is too overwhelming or expensive, you can still invest in real estate through REITs.
REITs are companies that own and operate income-generating real estate. Investors are paid out dividends without the need for any type of hands-on maintenance that goes along with traditional property ownership. This provides broad exposure to a pool of real estate with what can be considered a low expense.
The stability of REITS comes from the fact that rents tend to rise as inflation rises. As a result, your wealth can also rise with REITs without committing a massive investment.
Prices for raw materials and goods tend to rise with inflation. This is why commodities can be good inflation hedges.
Keep in mind that commodity prices depend heavily on supply-and-demand factors that are often beyond human control. That means that your investment can be impacted by everything from weather and geopolitical events to “influencer” trends. Here’s a look at some commodities options that are particularly resilient against inflation:
- Crude oil.
There’s no need to put all your eggs in one basket with commodities. Even tried-and-true choices like gold are prone to wild fluctuations. Diversifying commodities is important.
Thankfully, using a self-directed IRA (SDIRA) is one of the best vehicles for holding a variety of alternative investments that don’t work with regular IRAs. While a conventional IRA is intended for stocks, bonds, certificates of deposit (CDs), and exchange-traded funds (ETFs), SDIRAs allows you to manage commodities, precious metals, real estate, and much more.
5. Utility Stocks
Utility stocks are really hard to top for slow, steady growth. The reliable income streams of utility companies allow them to pay relatively high dividends.
However, the allure of high dividends is exactly why you should do your homework on utility companies before choosing. Investors would do well to seek out stronger companies even if they present lower payouts in the short term.
Additional Tips for Inflation Investments
Inflationary times require additional vetting before making investments. However, there are some tips to follow regardless of which areas you end up investing in. Keep these thoughts in mind:
- 1. Look for companies capable of raising prices without necessarily harming business. This means that they’re very likely to be able to raise prices without taking a revenue hit.
- 2. While it’s never a bad idea to keep some percentage of your cash liquid, you don’t want to miss out on opportunities for high yield over the long term by sitting on what you have out of fear. Historically, your cash can earn a much higher interest rate when invested in stocks compared to when it’s sitting in a savings account. That’s not advice to pour everything into an index fund. You’ll want to follow the rules of personal finance to keep more cash around if you’re on a fixed income compared to someone with potential increases in earning potential.
- 3. Branch out with cryptocurrency for retirement and short-term investing. The limited supply of cryptocurrencies could end up making this a great inflation-proof investment over the long run.
- 4. If you’re currently renting, consider that locking in a fixed rate on a mortgage might be a smart investment against the rising rental costs that accompany inflation.
There’s no need to let your money sit just because inflation creates unique investing challenges. It’s a matter of balancing historical returns with the current actions of the Federal Reserve to make your decisions.
Utilizing self-managed investment tools can be a great way to ensure that you’re adjusting your strategy in real-time based on market happenings.