What Are the Best Investments During Inflation?

Prices that continue to rise have become something that Americans cannot avoid. You are constantly bombarded about inflation on all your news feeds, you notice it when you shop at your local grocery store, and hopefully, you have given thought to how inflation might be having an impact on your investments.

Inflation kills your wealth silently. It can erode the purchasing power of your investor’s portfolio, even when it is still maintaining positive returns year after year.

Any long-term investments that you have should be earning a minimum of 4% of the average U.S. inflation rate that dates back to 1959, to stop you from losing any ground. Below is a closer look at the investments that you can rely on to help you as an investor combat inflation.

Investing in an asset with a return that outpaces the inflation rate is a great way for consumers to outpace inflation.

Experts usually suggest investing in a diversified index fund that is based on broad-market indexes such as the S&P 500, rather than trying to hold on to funds in the form of cash. This is an approach that offers a way for you to grow and diversify your portfolio, while at the same time lowering the risks relating to loss caused by inflation.

When it comes to reinvesting your returns, the sooner you decide to invest along with how long you remain invested, the better, regardless of where the markets might be.

Even though it is not possible to predict market trends in the future, long-term, smart investing in a certain asset class is still a great way to combat inflation. Below are some of the best assets to consider:

Outpace Inflation By Investing In Gold

Gold remains the oldest of hedges against inflation. This precious metal has experienced average gains of 10% annually over the last 20 years between September 2001 and September 2021. Over this same time frame, inflation averaged 2%, which means investors netted a 7% rate of return.

But avoid putting your entire life savings into a precious metal such as gold, since there are a few factors, you first need to understand when it comes to gold investments.

When investing in gold physically, there are costs involved to insure and store bullion and coins. This can detract from your returns. Investing in gold-focused ETFs (exchange-traded funds) and mutual funds can drastically lower these costs, yet it is still importance to keep in mind that gold prices are extremely volatile, particularly across the short term.

You should also gain an understanding of whether the funds you have chosen are aimed at tracking the gold price or rather on the gold mining enterprises. Both are favorable methods to experiment in the gold markets, yet the returns on each can vary considerably.

More and more investors are looking to protect their wealth by adding some precious metals to their portfolio.  Read this guide if you would like to know how to open a precious metals IRA.

Investments In Stocks To Outsmart Inflation

Deciding to invest in stocks to diversify your portfolio is also a great way to keep inflation at bay. From the year July 2013 to July 2023, the S&P 500 was one of the key benchmarks for U.S. stocks that generates an average annual return of close to 10% when using dividends reinvested. After you have accounted for inflation, you will still be receiving around 8% on average on your annual returns.

Even with the drastic price gains of today, you would have still soundly trounced these rising prices. From July 2013 to July 2023, inflation increased at an annual rate of around 3%.

There is no real requirement to go the route of choosing individual stocks. This is incredibly risky and research-intensive to try and take advantage of this historic growth type. You can start by choosing an S&P 500 ETF or S&P 500 index fund, this will track the return of the index while keeping costs very low. Since these contain many stocks (hundreds), they offer low-cost, simple diversification, which lowers portfolio and risk management headaches.

Keep in mind that investing in any stock will never be risk-free. You can lose money over the shorter term, and when it comes to the stock-index funds, you won’t be allowed to choose the companies where your funds are invested in. If you have concerns about keeping your hard-earned money away from any of the companies you do not ethically agree with, you may be better off with an ESG (environmental, social, and governance) fund instead.

Real Estate

Most inflation-averse investors will turn to other assets such as real estate to provide a hedge when it comes to their holdings. However, the variability and size of this particular market often make it close to impossible to generalize when it comes to this specific asset class.

An analysis conducted by the Massachusetts Institute of Technology discovered that “retail property” has shown to be the very best real estate category when it comes to beating inflation, while industrial properties and apartment buildings seemed to fare less well. The MIT analysis made attempts to make sure appreciation, maintenance costs, and inflation were factored in when deciding on what real estate type performed the best (over the long term).

Single-family home ownership could offer an attractive hedge against factors such as inflation, which would depend on the conditions of the local market. According to the Federal Housing Finance Agency, when taken on aggregate, the U.S. value of homes has experienced a 3% average growth annually since 1989. Yet this is data that doesn’t account for maintenance or other types of costs.

Here is one of the issues with investing in real estate. It will require a large buy-in and various costs involved for maintenance and financing. This is when trusts in real estate investments can offer an easier method for investors wanting to add diversification to their portfolios while taking advantage of the inflation-hedging benefits that real estate provides. To learn more, you can visit: https://www.wellingscapital.com/blog/real-estate-inflation-hedge

When investing in REITs, can be compared to purchasing funds that own real-estate assets exclusively. Regulations stipulate that they must pay out dividends regularly, which makes these especially appealing to many income investors.

At the same time, REITs, have offered a robust performance historically. Over the past ten years, the REIT Index has had an annual return average of over 9%. Making this option one of the best ways to combat inflation.

An Introduction To Inflation

Persistent deflation could result in increasing unemployment and undermining the financial systems and the “broader economy” by making it harder to service debts. The Federal Reserve in the U.S. has targeted a 2% inflation average rate over the years since it is most consistent when it comes to the Reserve’s dual mandate which involves promoting maximum employment and price stability.

A sharp deviation from modest inflation rates (in either direction) will present a challenge for investors along with consumers. This is because they pose the risk of causing dramatic economic disruption. They also have unpredictable and varying effects on different asset classes.

When it comes to economics, the term inflation is described as “a quantitive measure”, which is a measure of “quantity over quality” which tracks the “rate of change” in prices for a standard “basket of goods”. Inflation is typically defined as a price increase over time, while the rate of these increases uses a percentage to express these increases.

The main advantage of choosing to invest during inflation would be to preserve the value of your portfolio. The second benefit would be to ensure your nest egg continues to grow. It could also prompt you to diversify, which is also a worthwhile consideration. Spreading the risks across multiple holdings is one of the time-honored methods of constructing a portfolio and it also applies to inflation-fighting methods as well as asset-growth strategies.

There aren’t any guarantees. The traditional inflation hedges won’t always work, while a unique economic condition may in some cases deliver outstanding results to a surprising asset, while what may have seemed like a winner is left far behind.