Most often the effects of inflation go unnoticed, especially when they vary fractionally, month-on-month. However, when rates are surging, and there’s a rise in fuel and energy costs, the pressure on individuals is universally felt.
Many are now seeking investment alternatives to offset the damaging effects of inflation. As a more recent strategy, investors are now turning to cryptocurrencies like Bitcoin, as a store of wealth, instead of leaving their money in the bank.
Even though cryptocurrencies may not be the best store of value, due to their evident volatility, it is clear to see that investors are desperately seeking an alternative to fiat currencies – and their vulnerability against inflation. This article uncovers 10 investment strategies that can help you stay ahead of the curve, in order to protect your savings in the current, inflation-heavy environment.
Staying ahead of inflation
In many countries, inflation rates outpace the rate at which salary increases, at a great disadvantage to people and their hard-earned cash. Now, inflation rates are at an all-time high since those reached in 2009 – during the aftermath of the financial crisis.
In the 1970s gold performed strongly in comparison to fiat currencies, while during the 1980s the returns were negative. More importantly, gold performs well during times of high volatility, especially within bear markets, even outperforming the stock market at times.
The biggest disadvantage of Bitcoin and other cryptocurrencies is their extremely high volatility. Due to this fact, you can see a mixed performance against fiat, but if you look at a longer time frame, the value of Bitcoin is increasing in comparison to fiat.
3. Real Estate
Buying a property and investing in real estate may be a good option to combat inflation. However, unlike the other assets mentioned above, it is no simple task to dip in and out of property investment, due to it being illiquid and requiring extensive management from the property owner.
In the case of rental property, investors can manage – and hope to offset – the effects of inflation through contingencies like raising the rent for tenants each year. However, when inflation is escalating at an alarming rate, as it is today, this is not entirely feasible.
Commodities have proved to be one of the best assets used as a hedge against inflation. One study by Vanguard, for example, showed that for each 1% increase in inflation, commodities’ value increased between 7% and 9%.
When we are talking about commodities we usually think about oil, agricultural crops, and livestock. However, commodities like oil are now beginning to lose ground as a thought-out investment, when a new wave of energy innovations like photovoltaic technology, could hold more potential for longevity.
Commodities perform well in specific situations but most of the time they are outperformed by other assets like stocks.
In the past, the value of stocks outpaced inflation by around 7% on a yearly basis. This is one of the reasons why equities are usually one of the assets that investors give themselves the highest exposure to.
Investing in equities is a long-term game because during periods of increased inflation equities don’t tend to perform that well. The reason is that as prices rise, businesses have higher expenses, and that limits their growth as well as stock value.
Investing in a single stock can be a risky investment strategy, so it’s best to thoroughly consider the short, medium and long-term gain before committing to this investment type.
6. Dividend-paying stocks
Choosing stocks that have a long history of paying dividends regularly is another good way to combat inflation. Some companies have even increased the dividends that they are paying out each year, such as 3M, and IBM.
In addition to stock dividends, crypto dividends are another option for investors looking to increase their passive income on their crypto assets.
7. Inflation-protected annuity
An annuity is a guaranteed payment from the insurance company that many people use for their retirement. The amount of money that you are being paid is usually lower in comparison to other asset classes, but the risk is also lower.
8. Short-term bonds
Short-term bonds are highly liquid and have a maturity of between 1 and 4 years. They are one of the safest options that are used during times of increased inflation, especially in comparison to equities.
Usually, increased inflation rates are followed by increased interest rates as well. This was observed last year, and continues at present, after the hawkish decision of the Federal Reserve produced an all-time high for the US Treasury bond yield, now sitting at 1.82%.
9. Fixed-rate loan
Another option is taking a fixed-rate mortgage loan for 20-30 years with low interest, meaning that the rate stays the same in spite of any changes to the baseline interest rate of your country’s respective central bank.
However, it should be noted that any debt obligations always carry a certain level of risk.
Treasury inflation-protected securities are bonds issued by the US government. They rise together with inflation since it’s measured by the CPI, Consumer Price Index.
When the value of TIPS increases, the interest paid increases as well, which protects investors especially during uncertain times of higher inflation.
What is the future?
Inflation is one of the many factors that investors need to be prepared for, especially when they are building an investment portfolio. To combat inflation it’s best not to leave your money “under the mattress”, but instead, invest it in various asset classes that hold – or better – increase in value over time, leveraging the initial value of your investment.
At times when inflation rates are on the rise could be the best moment to review your portfolio and investment decisions. Everyone wants to take home the value of their hard-earned cash, without worrying about losing that value due to uncontrollable factors, such as inflation.
Since inflationary environments are becoming more of a norm than a rarity, investors must prepare to operate in a way that maximises the value of their investments, through analysing and diversifying their portfolio.
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