Inflation is the decrease in purchasing power of a given currency, and we’ve seen it happen over time. It is why most things are more expensive today than they were when we were young. Too much inflation can be a good reason to start investing in assets as this has growth potential to stop its effect.
Financially speaking, inflation affects everyone’s purchasing power, when you think about your long-term financial goals. The more the inflation rate beats the economy, the higher your return target needs to be to maintain the purchasing power of your assets. For example, if the average annual inflation rate is expected to be 2 percent, to keep up with inflation, every investor should strive to create an investment portfolio with a rate of return of at least 2 percent to maintain their purchasing power.
What Must You Do?
In order to keep up with inflation, you’d need to review your investment portfolio as a whole and evaluate your situation. There is really no easy solution but to mix your investments to provide potential returns that can keep up with the effects of price increases. Some investments may be more suitable for the job than others.
Over time, stocks tend to keep up with inflation better than bonds, because their earnings can be adjusted upward because companies have greater pricing power. So if you are a young investor, retiring for 40 years, and allocating a lot of stocks, you may not need to add too much additional protection against inflation. However, a retiree with a very conservative investment composition may be exposed to high inflation risk. You can mitigate these risks by adding inflation-resistant investments to your portfolio and diversifying them across asset classes.
Five Assets That are Inflation-Resistant
Cash may not be a growth asset but it sure can catch up with inflation in nominal terms when it is accompanied by increases in short-term interest rates.
Last year, the pandemic proved just how predictable the economy can be, hence the need for cash at that time, especially for those who had them in high-yield savings accounts and money markets.
2). REAL ESTATE
Traditionally, real estate works well in times of high inflation because property values can increase. As the owner of the house, you can increase the rent in an inflation period which gives you higher income over the inflation rate.
Asides from owning a property, you can invest in real estate through REITs (short for Real Estate Investment Trusts) or in mutual funds that invest in REITs.
Although gold is not always able to withstand rising inflation in the short term, it tends to remain unchanged in the long term (i.e. for decades). Gold is often described as an inflation hedge as the price goes up when the purchasing power of the dollar declines.
The prices of bulk commodities such as oil, metals, and agric products generally rise with inflation. This means they can be well resistant to Inflation.
Investing in such commodities can be risky though, as their prices are highly dependent on supply and demand, which may also not be predictable. The chances of getting a good return on investment may be high, but so is the risk of losing.
5). SHORT-TERM BONDS
Investing in short-term bonds is the same as storing cash in a CD or high-yielding savings account. However, if a rise in inflation leads to high-interest rates, short-term bonds are more resilient, while long-term bonds suffer loss. So, when it comes to bonds, it’s better to invest in the short- and medium-term, not long-term. To further buttress this, we think it is good to invest in bonds that take a very short time to mature because when interest rates start to rise rapidly, they will be less affected.
You’re Your Most Precious Asset
When you invest in yourself, you are able to prepare for any uncertainty in the future. This type of investment is able to boost your earning power, which is the surest way to beat any form of inflation. Start acquiring up-to-date knowledge in the area of your career or business. You can learn new skills that are currently in demand or those that will be needed in the near future. This will help you stay on top of the changing needs in your industry and also help keep your career from slumping.