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Last Updated on December 12, 2023

Inflation, the general rise in the price levels of goods and services, has historically been a universal economic concern. The potential erosion of purchasing power creates a real risk for investors. However, during periods of inflation, certain types of investments tend to perform better than others. These inflation-resistant investments can serve as a reliable hedge, preserving your wealth during times of economic instability.

Best Investments During Inflation

  • Gold & Silver
  • Real Estate
  • Bitcoin
  • Stocks
  • Commodities 
  • Bonds
  • TIPS

1. Gold & Silver

four rows of silver and gold bars

  • Tangible assets with intrinsic value
  • Often inversely related to the dollar’s value
  • Historically, their value tends to rise with inflation
  • Allows for both physical and digital (IRA) investments

Gold and silver have been recognized as a store of value for thousands of years. In periods of economic uncertainty and inflation, they have typically served as a reliable hedge. They are tangible assets with intrinsic value, and their price often moves inversely to the dollar’s value. This inverse relationship means that as the value of fiat currency decreases (a natural consequence of inflation), the relative worth of gold and silver increases.

Precious metals like gold and silver can be held in various forms. Investors can opt to physically hold these metals in the form of coins or bars, or they may choose to invest in a Gold or Silver IRA. Precious metals IRAs offer the benefits of owning gold and silver, along with the tax advantages of an IRA, making it an attractive option for many investors.

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gold, black, and green banner for a gold ira kit

2. Real Estate

  • Tangible asset with potential income-generating capacity
  • Inflation can lead to increased property and rental values
  • Provides potential tax advantages

Real estate investments have long been favored for their ability to serve as a hedge against inflation. Like gold and silver, real estate is a tangible asset. However, it has the additional benefit of potentially generating income through rent. As inflation leads to higher prices, property values and rental rates tend to increase correspondingly, offering real estate investors a level of protection against inflation’s erosive effects.

Additionally, real estate can provide potential tax advantages. For example, the IRS allows for certain deductions related to property depreciation, repairs, and management expenses. Furthermore, real estate investors can benefit from “1031 exchanges,” which allow them to defer paying capital gains tax when trading up to a more valuable property.

3. Bitcoin

  • Digital asset known as “digital gold”
  • Limited supply can potentially counteract inflation
  • High volatility can mean significant potential returns (and risks)

Bitcoin, often referred to as “digital gold,” has gained recognition as a potential hedge against inflation. Bitcoin’s protocol has a built-in scarcity, with a maximum supply of 21 million coins. This inherent limit to its supply mirrors the finite amount of gold and other precious metals, which can help counteract inflationary pressure.

However, it’s important to note that Bitcoin is characterized by high volatility, which means potential for significant returns but also substantial risks. Its relatively short history compared to other assets also leaves some uncertainty about its long-term performance during different economic conditions.

4. Stocks

  • Represent ownership in productive assets
  • Some companies can pass on increased costs to customers
  • Dividend-paying stocks offer a stream of income

Stocks represent ownership shares in companies, which are inherently productive assets. As such, they have the potential to increase in value over time, even during periods of inflation. In some cases, companies can pass increased costs caused by inflation onto their customers, preserving their profitability.

Additionally, dividend-paying stocks offer a stream of income, which can be particularly attractive during inflationary times when the real return on many fixed income investments may be declining. However, it’s essential to select stocks carefully, as not all companies fare well during inflationary periods.

5. Commodities

  • Tangible assets that can increase in price with inflation
  • Wide range of options including energy, agriculture, and metals
  • Can be accessed through physical ownership, futures contracts, or ETFs

Commodities like oil, natural gas, agriculture products, and various metals can serve as effective inflation hedges. As the cost of goods rises with inflation, so too does the price of these fundamental commodities, as they play a crucial role in the production process of many goods.

Investors can gain exposure to commodities through several means. They can directly own physical commodities (like gold or silver), invest in futures contracts, or buy shares of commodity-focused ETFs or mutual funds. Each approach has its pros and cons, and the best method depends on individual investor preferences and risk tolerance.

6. Bonds

  • I-Bonds and some others are designed to keep pace with inflation
  • Stable income stream
  • Lower risk than stocks and commodities

Certain types of bonds, particularly Treasury Inflation-Protected Securities (TIPS) and I-Bonds, can be excellent investments during inflation. These bonds have mechanisms in place to keep pace with inflation, helping to maintain the purchasing power of your investment.

However, not all bonds perform well during inflation. In general, fixed-rate bonds can be hurt by rising inflation, as it erodes the value of the fixed interest payments you receive. Therefore, investors must select the right types of bonds to serve as an effective hedge against inflation.

7. Treasury Inflation-Protected Securities (TIPS)

  • Principal adjusts with inflation
  • Backed by the U.S. government
  • Interest and principal payments guaranteed to keep pace with inflation

TIPS are a unique type of U.S. Treasury bond designed specifically to protect against inflation. The principal value of TIPS adjusts with inflation as measured by the Consumer Price Index (CPI). As a result, the interest payments you receive (which are a fixed percentage of the principal) increase when inflation rises.

TIPS are backed by the U.S. government, making them one of the safest investments. With TIPS, both your interest payments and principal are guaranteed to keep pace with inflation, preserving the purchasing power of your money.

What’s Behind our Current Inflationary Cycle?

a sign that says "inflation ahead" on it

In order to better understand our current inflationary cycle, it is crucial to delve deeper into the main factors that are currently contributing to it. They include unprecedented fiscal and monetary stimulus, disrupted supply chains, low-interest rates, and a rebounding demand for goods and services post-COVID.

Fiscal and Monetary Stimulus

One of the most significant factors behind the current inflationary cycle is the unprecedented level of fiscal and monetary stimulus. In response to the economic disruption caused by the COVID-19 pandemic, governments worldwide have engaged in vast spending initiatives to support businesses and individuals affected by the crisis. Concurrently, central banks have implemented ultra-accommodative monetary policies, including slashing interest rates to historical lows and buying large quantities of government bonds, a process known as quantitative easing.

This dual stimulus approach has flooded economies with liquidity, creating an environment ripe for inflation. When the supply of money increases rapidly while the growth in goods and services does not keep pace, the result is typically higher prices.

Supply Chain Disruptions

The pandemic has also disrupted global supply chains, causing a significant imbalance between supply and demand in many sectors. Travel restrictions, lockdowns, and workforce shortages have all contributed to delays and inefficiencies in the production and distribution of goods.

Such disruptions have resulted in a scarcity of certain goods, pushing prices upward. For example, we’ve seen sharp increases in the cost of building materials, semiconductors, and even certain food items. As long as these supply chain issues persist, they will continue to exert upward pressure on prices.

Low-Interest Rates

Low-interest rates are another contributing factor to our current inflationary cycle. Central banks use interest rates as a tool to control inflation and stimulate economic growth. Lowering interest rates encourages borrowing and spending, which in turn stimulates economic activity.

However, when interest rates are kept low for an extended period, as has been the case in many economies during the COVID-19 pandemic, it can lead to excess money in the system. This excess can cause too much demand for goods and services, leading to price increases and, consequently, inflation.

Rebounding Demand

Finally, as economies reopen and restrictions ease, there is a strong rebound in demand for goods and services. Consumers are spending money saved during lockdowns, and businesses are restocking and investing. This increased demand, especially when paired with supply chain disruptions, is resulting in increased prices.

Furthermore, as employees return to work and job markets stabilize, wages have started to increase. While this is generally a positive sign of economic recovery, it can also contribute to inflation. When businesses have to pay employees more, they often pass these costs onto consumers in the form of higher prices.

In summary, our current inflationary cycle is the result of a complex interplay of several factors, largely catalyzed by the global response to the COVID-19 pandemic. Navigating this economic environment requires a deep understanding of these forces and a strategic approach to investing.

How to Decide Which Investment is Best For You

Investing is a personal journey, as unique as the individual making the decisions. Choosing the right investment to protect against inflation involves careful consideration of several key factors. Here, we’ll delve into those factors and provide guidance on how to navigate this important decision-making process.

Determine Your Financial Goals

What do you hope to achieve through your investments? Are you investing for long-term growth, immediate income, or preservation of capital? The answer to these questions can help guide your investment decisions. For example, if you’re focused on long-term growth, you might consider investing in assets that have the potential for significant appreciation, like stocks or real estate. On the other hand, if you need immediate income, you might opt for bonds or dividend-paying stocks.

Evaluate Your Risk Tolerance

Risk tolerance refers to your ability and willingness to endure potential losses in your investment portfolio. It’s crucial to understand your risk tolerance because all investments come with some level of risk. Stocks, real estate, and cryptocurrencies have the potential for high returns, but they can also be volatile and may lose value. Conversely, bonds and TIPS tend to be less risky, but they also typically offer lower returns. Understanding your risk tolerance can help you choose investments that align with your comfort level.

Consider Your Investment Horizon

Your investment horizon, or the amount of time you expect to hold an investment before needing the funds, can also guide your investment decisions. If you have a long-term horizon (typically ten years or more), you might be able to endure the short-term fluctuations of riskier investments in exchange for potentially higher long-term returns. Conversely, if your investment horizon is short, you may want to opt for safer, more stable investments.

Understand the Impact of Inflation on Different Investments

Different investments respond differently to inflation, and it’s essential to understand these dynamics when choosing your investments. As we discussed earlier, assets like gold, silver, real estate, and TIPS have historically performed well during inflationary periods. However, the past performance of these or any investments does not guarantee future results, so it’s crucial to consider other factors as well.

Diversification

Diversification involves spreading your investments across different asset classes to balance risk and return. By diversifying, you ensure that at least some of your investments are likely to perform well under various economic conditions. A well-diversified portfolio might include a mix of stocks, bonds, precious metals, real estate, and potentially even some cryptocurrency.

Consult with a Financial Advisor

Investing can be complex, and making informed decisions requires a deep understanding of financial markets and economic conditions. A financial advisor can provide valuable guidance based on your individual financial situation, goals, and risk tolerance. They can help you create a diversified portfolio that aligns with your objectives and guide you through the process of adjusting your investments as conditions change.

In summary, choosing the right investments during an inflationary period involves careful consideration of your goals, risk tolerance, and investment horizon. By understanding the impact of inflation on different investments and diversifying your portfolio, you can position yourself for financial success. And, of course, consider consulting with a financial advisor to ensure your investment decisions align with your broader financial plan.

Final Thoughts

inflation guide

Inflation can pose a significant risk to investors by eroding the real value of money. However, by thoughtfully selecting and diversifying your investments, you can protect yourself against inflation and even potentially profit from it. While the investments mentioned in this article have historically performed well during inflation, remember that past performance does not guarantee future results. As always, consider consulting with a financial advisor before making significant investment decisions.