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Last Updated on December 23, 2023

With the tumultuous economic climate that the world is currently navigating, understanding how to make savvy investment decisions during periods of inflation is an indispensable skill.

Inflation refers to the general rise in the prices of goods and services over time, which subsequently erodes the purchasing power of money. In essence, a dollar today is not worth the same as a dollar tomorrow.

But fear not, this does not mean that your investments are doomed to lose value. There are many ways to use inflation to your advantage and even profit from it.

This article seeks to provide an in-depth understanding of these opportunities, offering strategies and potential investments that could help you navigate and even profit from inflation.

Key Takeaways

  • A balanced portfolio consisting of diverse assets like gold, silver, real estate, commodities, and inflation-protected securities can hedge against and even profit from inflation.
  • Understanding the drivers behind inflation can provide a foundation to make informed decisions and develop effective investment strategies.
  • The effects of inflation on your investments and financial health are not solely negative; with the right strategy, you can profit from inflation.

Top 7 Investments That May Profit During Inflation

Gold, Silver, Other Precious Metals

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Key Points:

  • Precious metals often act as a store of value during inflationary periods.
  • The value of precious metals tends to rise as fiat currencies depreciate.
  • Investment options include physical possession, ETFs, and precious metals IRAs.

Historically, precious metals such as gold, silver, and platinum have acted as a hedge against inflation. They retain their value over time and tend to increase in value when the purchasing power of fiat currencies, such as the dollar, is decreasing due to inflation. This characteristic makes precious metals a safe haven during turbulent economic times.

Investors can purchase physical precious metals, invest in exchange-traded funds (ETFs) that track the price of these metals, or open a precious metals Individual Retirement Account (IRA). Each of these methods has its pros and cons. Physical possession provides a tangible asset, but it requires secure storage. ETFs offer liquidity and ease of trading, while precious metals IRAs combine the benefits of physical metals with the tax advantages of an IRA.

Real Estate

Key Points:

  • Real estate prices and rental income often increase during inflation, providing higher returns.
  • Investment can be done directly or indirectly through REITs.

Real estate tends to be a good investment during inflation. As the prices of goods and services increase, so do property prices and rental income. This allows real estate investments to maintain their value and provide an effective hedge against inflation.

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Investors can directly purchase property, which provides control and potential tax benefits, but also requires significant time and financial commitment. Alternatively, investors can invest indirectly through Real Estate Investment Trusts (REITs), which provide a way to invest in a diversified portfolio of properties without the need for management or maintenance.

Commodities: Oil, Soybeans, Etc

Key Points:

  • Commodities often increase in price during inflation.
  • Investment options include futures contracts and commodity-focused ETFs or mutual funds.

Commodities like oil, soybeans, and wheat are goods that have intrinsic value and are used in our everyday lives. As the cost of production and distribution rises during inflation, so does the price of these commodities.

Investors can invest in commodities through futures contracts, which are agreements to buy or sell a specific commodity at a predetermined price at a specific future date. Alternatively, for those who prefer less complexity and risk, investing in commodity-focused ETFs or mutual funds can provide a more accessible way to gain exposure to this asset class.

Inflation-Indexed Bonds

Key Points:

  • The principal amount of these bonds is adjusted in line with inflation, preserving the real value of the investor’s capital.
  • They protect investors from the eroding effects of inflation on their investments.

Inflation-indexed bonds are bonds whose principal amount is adjusted periodically based on the rate of inflation. This adjustment ensures that the real value of the investor’s capital is preserved, even as inflation erodes the purchasing power of money.

These bonds pay interest on the adjusted principal, so as inflation increases, so do the interest payments, providing an effective hedge against inflation. They are a particularly useful investment for those seeking a low-risk way to protect their capital.

Treasury Inflation-Protected Securities (TIPS)

Key Points:

  • TIPS are a type of inflation-indexed bond issued by the U.S. Treasury.
  • The principal value and interest payments of TIPS increase with inflation.

Treasury Inflation-Protected Securities (TIPS) are U.S. government-issued bonds that are designed to protect investors from inflation. The principal value of TIPS is adjusted with inflation, and they pay interest twice a year at a fixed rate on the adjusted principal.

As a result, when inflation rises, both the principal value of TIPS and the interest they pay increase. This makes TIPS an attractive investment option during periods of rising inflation. Being backed by the U.S. government, they also offer a high degree of security.

Mortgage-backed Securities

Key Points:

  • These are bonds that are backed by a pool of mortgages.
  • They can provide higher yields during periods of rising inflation and interest rates.

Mortgage-backed securities (MBS) are bonds backed by a pool of mortgage loans. When homeowners make their mortgage payments, the interest and principal are passed through to MBS investors.

As inflation rises, interest rates often rise as well, which can lead to higher yields for MBS investors. However, investing in MBS can be complex and carries risks, including the risk of default on the underlying mortgages, so it may be more suitable for experienced investors.

Consumer Staples Stocks

Key Points:

  • These are stocks of companies that produce necessary goods, such as food and household items.
  • These companies tend to maintain their revenue streams even during inflationary periods.

Consumer staples stocks represent companies that produce goods that are always in demand, such as food, beverages, and household items. These companies are often able to pass on higher costs to consumers during inflationary periods, which can help maintain their profitability.

Because these goods are always needed, consumer staples companies tend to have stable revenues, and therefore, their stocks can provide steady returns and dividends during inflationary periods. Investing in consumer staples stocks can be a good way to add stability to an investment portfolio during times of inflation.

What’s Behind the Current Inflation?

a sunset with a yellow sign in the foreground that reads "INFLATION AHEAD"

Key Points:

  • Economic stimulus measures, such as the ones implemented during the COVID-19 pandemic, can lead to increased inflation.
  • Supply chain disruptions can create shortages, leading to increased prices.
  • Pent-up consumer demand can fuel inflation.

Inflation, in its most basic sense, is the rate at which the general level of prices for goods and services is rising. Several factors can influence inflation, and the current scenario is no different.

One key driver behind the current inflation is the massive economic stimulus measures implemented by governments worldwide in response to the COVID-19 pandemic. These measures have injected substantial amounts of money into the economy, leading to increased demand for goods and services. However, when this demand outpaces supply, it can result in upward pressure on prices, thereby fueling inflation.

The pandemic has also caused significant disruptions to supply chains. Travel restrictions, factory shutdowns, and labor shortages have led to a decrease in the production of many goods. This reduced supply against a backdrop of recovering demand has resulted in increased prices for many products, further exacerbating inflation.

Furthermore, as economies recover from the pandemic and restrictions are lifted, there is a considerable amount of pent-up consumer demand. People are eager to spend money on travel, dining, shopping, and more. This surge in spending can outpace the economy’s ability to supply these goods and services, leading to higher prices and, therefore, inflation.

It’s important to note that these factors are interconnected, and their effects on inflation can compound. For instance, economic stimulus measures can exacerbate supply chain disruptions by increasing demand faster than supply can recover. Similarly, pent-up consumer demand can put further strain on already disrupted supply chains. Understanding these dynamics can help you better anticipate and prepare for the impacts of inflation.

Is There an End in Sight?

Predicting the end of inflation or the rate at which it will decrease is a complex task that involves numerous factors, including economic indicators, government policy, and global market trends. While central banks and governments are implementing measures to curb inflation, uncertainties remain.

What is certain, however, is that investors can employ strategies to protect and grow their wealth during these uncertain times. By understanding the nature of inflation and how it affects different asset classes, investors can position their portfolios to navigate inflation effectively.

How Inflation Impacts Your Wallet and Investments

Key Points:

  • Inflation erodes the purchasing power of money, causing the same amount of money to buy fewer goods and services over time.
  • The impact of inflation is particularly hard on savers, as the value of cash in savings accounts decreases in real terms.
  • On the flip side, certain investments like real estate and precious metals can increase in value during inflationary periods.
  • Adapting your investment strategy to account for inflation can potentially lead to profit.

Inflation is often described as a silent thief, slowly eroding the purchasing power of your money. In other words, as the general level of prices rises, each unit of currency buys fewer goods and services. This is particularly damaging to savers, as the real value—the purchasing power—of the cash sitting in savings accounts diminishes over time.

For instance, if the annual inflation rate is 2%, then a product that costs $100 today will cost approximately $102 next year. So, if you’re not earning at least a 2% return on your savings, you’re effectively losing money in real terms.

However, the impacts of inflation are not universally negative. Certain types of investments can actually increase in value during inflationary periods. Real estate, for example, often appreciates during times of inflation. As the cost of materials and labor rise, so too does the value of property. Similarly, precious metals like gold and silver tend to increase in value as inflation rises.

This is where an adaptive investment strategy comes into play. By understanding how inflation impacts different asset classes, you can adjust your portfolio to not only protect against inflation, but potentially even profit from it. This may involve shifting more of your portfolio into assets that tend to perform well during inflationary periods or considering investments that offer inflation protection, such as TIPS.

In the end, the key is understanding that inflation’s effects on your wallet and investments are not a foregone conclusion. With an informed and proactive strategy, you can navigate the challenges of inflation and ensure your financial health remains strong.

Final Thoughts

While inflation can pose challenges, it also presents opportunities. By understanding the driving forces behind inflation and the impacts it has on different asset classes, you can make informed decisions about your investment strategy.

A balanced, diversified portfolio—including gold, silver, real estate, commodities, inflation-protected securities, and consumer staples stocks—can provide a robust defense against inflation and even turn it into a profit-making opportunity.

The key is to remain informed, flexible, and prepared to adjust your strategy as needed. Remember, the best investment strategy is one that aligns with your personal financial goals and risk tolerance.

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