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Investing during rising inflation comes with challenges for any investor. As inflation rises, it’s important to prepare for detours on your financial freedom journey. Your purchasing power may fall, but your profits don’t have to.
Expectations for 2023’s inflation forecast are that inflation will be decreasing. Estimates are said to “still be above a long-term baseline of 2.3%,” according to the Congressional Budget Office.
But what does that mean for your investment strategy?
If you focus on strengthening your financial plan, you can alleviate the fear and uncertainty that comes with a downturn in the stock market and rising inflation.
Keep reading to learn how to invest during inflation.
- Lower cyclical unemployment
- Increased wages
- Increased spending
- Market downturn
- Price increases
- Higher demand
- Lower supply
- Rising interest rates
- Increasing demand for goods and services
- Scarcity of materials for in-demand goods
- Lowered supply and increased wages
- Price hikes by companies during spending increases
Although several effects of inflation are immediate, those same effects can be long-term as well.
Higher inflation today means you’re probably not saving as much for retirement. Does your financial plan assume interest rates of 2% or 3%? Does your financial plan still work during 10% or higher inflation rates?
Saving $500 per month during periods of 2% inflation may not be the same $500 per month savings during periods of 10% inflation. That $500 savings may be split between groceries, rent, mortgage payments, transportation costs, home repairs, or other expenses. That $500 savings may only really be $300 or $250 or even less as compared to before rising inflation.
To better understand investments during inflation look at the causes of inflation.
How Does Inflation Cause Stock Volatility?
Stock prices often go down during times of high inflation. With lower unemployment, high inflation, and demand for labor, the labor market demands an increase in wages. Increases in wages and material costs can lead to a market downturn. Struggling and failing businesses can add to a market downturn.
According to MarketWatch, “rampant inflation and the Federal Reserve’s plan to sharply raise interest rates in response are acting as drags on the economy.” Slower economic growth due to inflation and lowering demand lead to drops in the S&P 500.
How to Profit from Inflation Surges
Some businesses thrive during inflation. Lower overhead costs and high-profit margins, coupled with necessary expenses, create a recession-proof business model. Look to invest in these types of businesses during rising inflation. Try looking at sectors like energy and housing.
The Federal Reserve increasing the interest rate isn’t enough to battle inflation. Investors need to tip the scales in their favor. A few ways to profit from inflation are real estate investing, value stocks, and commodities.
What Are Inflation Hedge Investments?
In financial terms, a hedge is protection or defense against a loss. Diversification is one type of hedge. Inflation hedge investments protect your portfolio from rising inflation.
Inflation hedge investments can include:
- Treasury Inflation-Protected Securities (TIPS)
- Real Estate
Don’t be afraid to add inflation hedges into a small percentage of your portfolio. Extra returns can compound over time into larger gains.
What Industries Tend to Do Well During Inflation Surges?
Think of what industry goods and services you use daily. Utilities are essential. Food is another daily essential. Work from home is changing the need for transportation to work. However, daily or weekly transport is still necessary for some suburban and rural areas.
Food, utilities, and basic expenses require income. Banks tend to do well during inflation. People still need to store or borrow money during times of high inflation.
What Should You Look For in an Investment Opportunity During Inflation Surges?
- It’s inflation-proof
- It scales
- It’s a necessary expense
Look for investments in goods and services that people still purchase or use during times of moderate inflation to high inflation. Investments that have high economies of scale and are daily expenses for most people can help you profit during rising inflation. Look for these investments in industries that profit in times of high inflation as well as moderate inflation.
Real Estate Investing During Inflation Surges
During times of rising inflation, rents and mortgages still need to be paid, even by those living on a fixed income. Mortgage rates may increase. If property management and mortgages deter you from real estate, invest in Real Estate Investment Trusts (REITs).
Don’t forget about crowdfunding or lending sites that allow you to invest in real estate as well.
Value Stocks Investing During Inflation Surges
In addition to real estate, value stocks can be a solid inflation hedge. One example of a value stock is JPMorgan Chase. Banks still lend during rising inflation. Value stocks appear to be priced lower, considering earnings, sales, dividends, etc. Appearing at a lower price is what makes value stocks appealing to value investors.
Commodities Investing During Inflation Surges
Like real estate and some value stocks, some commodities are essential even when the inflation rate is rising. Coffee is a good example of a commodity, as it’s one of the few luxuries most people can afford. Along with coffee, even during inflation, everyone still eats food.
Our food system is dependent on wheat and corn. Homes need heat and vehicles need gas. Oil and natural gas are necessities during inflation for most. Electric vehicles increasing in popularity, however, means the utility sector shouldn’t be ignored.
Investments That Protect Against Inflation
As you can see so far, a financial plan allows you to focus on optimizing your purchasing power during inflation. Instead of worrying about the stock market and your portfolio, focus on rising prices and how to cut your expenses. Investing in industries that survive and even thrive during inflation boosts your portfolio on your financial freedom journey.
As demand increases, businesses keeping up with rising inflation hire more workers. On the other hand, when the demand and inflation levels both lower, layoffs can occur. Also, businesses that have trouble turning higher profits can start layoffs. Those businesses lose profits due to the rising costs of materials and resources even with demand increasing.
Inflation may seem frightening and cause you to not want to invest. But did you know that there is an opposite of inflation? This is known as deflation. By contrast, inflation isn’t as scary as it sounds.
How Do Gold and Other Commodities Protect Your Portfolio Against Inflation?
Gold tends to keep up against inflation over the long-term, some experts suggest. Other commodities — including oil, metal, and agricultural products — increase in price during higher inflation. These are commodities that people use often and even daily.
I mentioned coffee being a daily luxury most people can afford. If I invested a dollar for every dollar I spent on coffee, I’d probably get my money back or close to it! I’ve been stockpiling coffee to make it through these rising inflation rates. (Hint: I’ve been buying the cheap, generic brand.)
What Are the Benefits of a 60/40 Stock/Bond Portfolio?
Harry Markowitz theorized the efficient frontier of asset allocation. To summarize: an asset allocation of stocks and bonds lies on a curve of risk vs. return. The point at which risk increases as stock allocation increases is near a 20/80 stock/bond portfolio.
An optimal portfolio therefore appears to be around a 40/60 stock/bond portfolio with return percentages of about 9.0% and a risk percentage of about 9.25% Although a 40/60 stock/bond portfolio is the highest risk vs. reward portfolio, it may not be optimal for those in the accumulation phase of their financial journey.
A 60/40 stock/bond portfolio yields closer to a 9.6% return percentage and 11.25% risk percentage. Yes, stocks are riskier, but that extra 0.5% compounding can battle rising inflation.
Why Should You Consider Investing In REITs During an Inflation Surge?
Real Estate Investment Trusts (REITs) are real estate investments with a hands-off approach. The hard work is done for you. In the world of real estate investing, REITs have many advantages:
- Residential and commercial diversification
- They’ve outpaced inflation in recent years
- They’re regulated
- No property management required
REITs are more liquid than rental real estate. You can sell shares of REIT mutual funds or exchange-traded funds. REITs diversify real estate holdings through residential and commercial real estate holdings. Lower and middle-income earners can invest in REITs over real estate. REITs have outpaced inflation over the last 20 years according to Investopedia. REITs are regulated by the Securities and Exchange Commission (SEC).
The Bottom Line
Investments can hedge against inflation. Using investments to hedge against inflation is easier than you think. Consider investing in commodities, sectors, real estate, or REITs to profit from high inflation.
Overall, you should stick to your financial plan, prepare for a potential layoff, and keep your emergency savings ready. And when considering your financial plan, add in hedges against inflation. Think about how TIPS, stocks, real estate, commodities, and other investments fit into your plan.
Know that inflation is cyclical. Have a strong financial plan. Know how to profit to ease the uncertainty during your financial freedom journey.