Inflation in the United States has hit its highest in 40 years topping out in May of this year at 8.6%. If you have not noticed yet, this means that your grocery bill has gone up even though you are purchasing the same items from last year and that the flight that you have booked for the upcoming summer getaway is now more expensive than the last time you checked.
Inflation is a general increase in the price of goods in an economy. In the US, inflation is measured often by changes in the Consumer Price Index (CPI), the average price of a speculative basket of the most common goods and services. This increase has averaged at 3.8% average over the past half-century. Moderate and consistent inflation is a sign of a healthy economy. However, recent rapid price increases can have a destabilizing effect.
What causes this price surge?
Inflation typically stems from an increase in costs of production such as the cost of raw materials or wages or an increase in the demand for goods and services. Thus, companies also play a special role particularly if they manufacture popular goods or provide important services. These companies can easily raise prices particularly if the customers are very willing to pay for the increase.
Adding to this concern, it is uncertain when the surge will taper off. While to a typical consumer this may only mean cutting down on splurges to safeguard your wallet, it is not the same for an investor like you who is more concerned about their money losing value in the market and making their investment strategy inflation-proof.
Inflation & Investors
It will even be exponentially better if you can take advantage of the current situation and recalibrate your existing investment strategy to earn multiples on your ventures. Here are some of the ways on how to safeguard your portfolio and make money during inflation:
1. Real Estate
Generally speaking, real estate tends to hold up well against inflation, as we just mentioned. Property values and rental income are likely to keep up with inflation over time, and the portfolios that have real estate in them tend to outperform the market during inflationary periods. But it’s important to realize that there are many different sub sectors of real estate, and not all have the same inflation resistance.
Thus, one should consider the real estate sector that you would be putting your money in as part of your investment strategy and take note of the following criteria: a shorter lease duration, pricing power, and demand resilience.
Some of the best areas to invest in real estate in an inflationary economy as generally they perform better than the others include rental property, industrial properties and real estate investment trusts (REIT).
Most importantly, having funds available to be able to seize an opportunity when it arises will be critical. Inflation can impact real estate investing both positively and negatively depending on what kind of investment it is, the specific market, and various other factors. You can secure funds through GL&L Holdings’ hard money loan to start on your real estate venture while the economy is in its inflationary period and start renting out your property once completed.
2. TIPS
TIPS (Treasury Inflation Protected Securities) are inflation- linked bonds issued by the Treasury that safeguards your investment portfolio during periods of high inflation. They mirror the rise and fall of inflation. When inflation rises, the interest rate paid also does. Similarly, when inflation falls, interest rates go with it.
And because TIPS are backed by the government, they are arguably one of the safest places to put your money and an effective way to expand your investment strategy while also adding up to your future retirement income.
3. Commodities
Commodities include raw materials and agricultural products like oil, copper, cotton, soybeans, and orange juice. Commodity prices are likely to rise alongside the prices of finished products made from those commodities during periods of inflation.
Agricultural commodities like grains, soybeans, fruits, livestock and timber are among such commodities. Industrial metals like iron, nickel, copper and steel also tend to do well during inflation. The same goes for natural gas and crude oil, which rose from less than $20 per 42-gallon barrel in April 2020 to more than $110 in May 2022.
You should take note, however, that commodities can also be extremely risky and may put your investment strategy off course since the prices for commodities depend largely on supply and demand, which can be highly unpredictable. The chances of reward may be high for you but so is the risk of losses.
4. Stocks
If you are looking at stocks as part of your investment strategy during an inflationary period, you must take note of growth stocks. Equities like growth stocks are publicly traded shares on the stock market that are expected to grow at a higher rate than average.
As mentioned, there are companies who can easily raise their prices if their customer base is willing to pay for the increase. These are companies with pricing power who can raise their prices to keep their profits. So, you must look for these companies on the stock market with pricing power to provide the best inflation protection.
5. Loans
Leveraged loans have a high potential as a hedge against inflation. As leveraged loans are floating-rate instruments, banks and other lenders who provide them can simply raise the interest rate charged so their return on investment (ROI) keeps up with inflation.
If you invest in a leveraged loan, you are likely to receive scheduled debt payments at the said floating interest rate. And since leveraged loans are usually given to companies with poor credit scores, they are likely to be risky borrowers with a tendency to default on their loans.
Review your Investment Portfolio
Make use of the current inflation surge as a good time to review your overall investment performance and allocation to make sure it aligns with your investment goals. The primary advantage of investing during inflation is to preserve the value of your portfolio, maintain its growth and provide ways for diversification.
Remember not to make drastic changes in your investment strategy just based off the current inflation conditions. Always remember that investment decisions must be made in consideration of the long-term.
