Suppose you have observed that the airfare for your upcoming vacation increased compared to last year or that your grocery bill has risen despite purchasing the same quantity of food. In that case, it is due to the recent inflation surge in the country. However, Ivory Johnson, CFP and founder of Delancey Wealth Management, explains that instead of gas becoming more expensive, it is the value of your money that is diminishing.
What is inflation?
Inflation is the sustained increase in the price level of goods and services over time. It reduces purchasing power of money and diminishes savings, having a major effect on economies, financial markets, and individual investors alike. Inflation is common across many economies due to factors like an increase in money supply, rising production costs, or decreased availability of essential commodities.
What are the effects of high inflation rates?
Inflation rates refer to the percentage increase in the general price level of goods and services over a period of time. Inflation can have a major impact on the economy, financial markets, and individuals. High inflation reduces money’s purchasing power, making it more expensive for consumers to purchase goods and services. Inflation can result in decreased consumer spending, weak economic growth, and higher unemployment. Furthermore, inflation increases production costs for businesses which could result in decreased profits or potential layoffs. Inflation may also adversely impact financial markets, as rising costs lead to higher interest rates and decreased bond values.
Furthermore, inflation can erode the value of savings and retirement accounts, making it harder for individuals to meet their financial objectives. Overall, inflation can have significant effects on both economies and individuals alike, making it essential to factor it in when making an investment or a financial decision.
4 best investments to Protect Yourself Against Inflation
Fortunately, there are several investments that offer protection against inflation. Here are the top four to consider when looking to protect yourself.
Real Estate
Real estate has long been seen as a safe haven against inflation. As property costs increase, so does its value; plus, it can generate income through rent payments or be sold at a profit. Real estate investments can be made directly by purchasing properties or through real estate investment trusts (REITs) or exchange-traded funds (ETFs).
When investing in real estate, it is essential to consider factors like location, market conditions, and potential rental income. In addition, real estate investing is usually a long-term endeavor that necessitates substantial capital. However, real estate can provide an impressive inflation hedge for those willing to take on this risk.
Short-term bonds
Investing in short-term bonds is a similar strategy to keeping cash in a savings account or CD, as it provides accessibility and safety for your money. However, in the event of inflation leading to higher interest rates, short-term bonds tend to be more resilient than long-term bonds, which could suffer losses. Therefore, focusing on short-term to intermediate-term bonds and avoiding long-term investments is recommended. In addition, investors can reinvest short-term bonds at higher interest rates when they mature. This makes it important to consider the maturity of bonds or bond funds when making investment decisions.
Commodities
Physical assets like gold, silver, oil, and agricultural products can serve as a hedge against inflation. Prices of commodities tend to rise with inflation due to increases in production costs and transportation fees. Furthermore, commodities can provide diversification benefits for portfolios that may be overexposed to equities or bonds.
Commodities can be acquired directly by owning the physical asset or indirectly through ETFs or mutual funds. When investing in commodities, factors like supply and demand, geopolitical risks, and storage costs must all be considered. As a result, commodity prices tend to fluctuate drastically over short periods of time due to supply/demand imbalances; however, over the long term, commodities could provide effective protection against inflationary threats.
Stocks
Stocks are ownership stakes in companies and can provide protection against inflation through capital appreciation and dividend income. Stocks have historically outperformed inflation, providing real returns that keep pace with rising prices. Furthermore, stocks offer diversification benefits for portfolios that may be overly focused on fixed-income or commodities investments.
When investing in stocks, it is essential to study factors like company fundamentals, growth potential, and industry trends. Stock investing can be risky and requires extensive research and analysis; however, for those willing to take on that risk, stocks could provide strong protection against inflation.
Takeaway
In conclusion, protecting yourself against inflation requires a diversified investment approach that includes real estate, commodities, and stocks. Each of these asset classes offers specific inflation-hedging benefits that can help shield you against its long-term effects. It is recommended to consult with a financial advisor before making any investment decisions, as each carries its own risks and rewards.