Investment Strategies That Work Best During Inflation

December 21, 2022

You can't read about investment for very long without hearing about inflation. The concept may be difficult to understand, but at its most basic, it comes down to the following: prices rise over time, causing your money to lose some purchasing power. If you could buy a car in 1980 for $5,500 and a comparable make and model for $49,000 in 2022, that speaks to the change in purchasing power. Sure, your 2022 model probably has a nicer stereo and several other value-added gizmos, but for the most part, your $5,500 doesn't have the same purchasing power in 2022 that it had in 1980.

In 2022, we're seeing inflation like nothing we've encountered in decades. It's risen above 8% at times, sending prices through the roof. Inflation is charted partly by measuring the changes in what consumers pay through the Consumer Price Index against the Producer Price Index, which measures the prices producers receive for their products. Through this, the Federal Reserve finds that the rate that indicates ideal employment and prices is 2%. What moves the needle? There are several factors, including demand-pull inflation, where demand for a good or service increases, but the supply filling that demand stays the same, causing prices to increase. The opposite can also be a factor with cost-push inflation, where the supply of a good or service is low, causing the prices to go up.


What can you, as an investor, do to fight inflation?

The general strategy, in this case, is to weather the storm. But how?

Weathering high inflation periods can be difficult for investors, but sensible strategies and careful management may help you maneuver through the tumult. Here are a few approaches you can take.

This often means a combination of equities and bonds along with other products like REITs and TIPS. However, this typically only works if you are already invested as the inflation rises. Other investors take advantage of the more consistent returns of bonds in these periods. While it's true that the returns of bonds are more consistent than other investments, they are also much lower.

Diversifying investments can also mean looking at international markets. Investing in assets from other countries can help decrease your vulnerability to the domestic economic downturn. Italy, Australia, and South Korea are major economies that don't rise and fall with the U.S. market.

To diversify, you must also know which investments to add to the mix.

Inflation hedges include investments that either maintain their value even during inflation or are expected to increase within a period. These include:

• Treasury Inflation-Protected Securities (TIPS)

TIPS are listed among the safest investments for two reasons:

First, they are backed by the U.S. government, so there’s no risk of default.

Second, Treasury Inflation-Protected Securities are designed to fall and rise to keep up with inflation and deflation, respectively.


• Stocks

Indeed, stock market prices go down with inflation. Still, it’s a better investment option than bonds since stocks pay dividends which can grow depending on the companies’ net revenue. Plus, the value of stocks typically grows in the long run. Data shows that the average annual return of the stock market is at 10%, as measured by the S&P 500.


• Gold and other precious metals

For over 20 years, gold’s annual increase in value has been averaging at 9.8%, which, minus the average inflation rate of 2.4% for the same period, leaves investors with a 7.08% rate of return.


• Real estate

Real estate is one of the best (if not the best) investments regardless of the state of the economy, as there will always be demand for homes and business spaces.

Real property value rises with inflation, and it helps you generate passive income through rentals. As a landlord, you can even take advantage of inflation to charge higher for the lease.

Aside from directly purchasing real property, you can also invest in a real estate investment trust (REIT). By buying shares in a REIT, you'll earn dividends without worrying about choosing the right property, management, and maintenance costs.

There are investment options (like the ones I’ve mentioned) that are least vulnerable to the whims of inflation. Nevertheless, they still come with risks, and some may not benefit your financial goals.

Thus, it would be best if you discussed it with your financial advisor and planner to explore options applicable to you, your risk appetite, and your objectives.

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The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your financial advisor, attorney, or tax advisor. For additional information and disclosures, please visit our website at MBE Wealth Management, LLC is a registered investment advisor.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.