If your trips to the grocery store and gas stations seem more expensive than usual, that’s because they probably are.
According to Board of Governors of the Federal Reserve Systeminflation rose by 7.5%, the highest rate in four decades.
Christopher J. Wallermember of the Board of Governors of the Federal Reserve System, said in a statementthat price increasesinflation) is the result of “supply bottlenecks and labor shortages, some linked to the pandemic.”
Like many people, I manage my investments because it’s cheaper. So, I made the rookie mistake of not taking inflation into account when I created my IRA portfolio.
This, my friends, has led to some massive failures in the last few weeks.
Needless to say, I need to fix this. So I spoke to Doug Careypresident and founder WealthTrace, a financial and retirement planning software company, to see if there is a way to protect your portfolio from inflation. That’s what he told me.
Why You Should Care About Inflation When Building Your Investment Portfolio
Before we get to the good stuffotherwise how to choose investments that will work well even if there is inflation), first, it is important to understand the relationship between inflation and your portfolio.
Inflation occurs when the prices of consumer goods and services increase to the point where it substantially reduces how much you can buy with every dollar.
To give you some context, The Federal Reserve says that the “acceptable” rate of inflation is about 2%. If more, your finances will suffer greatly.
But what does this have to do with your portfolio?
Well, Carey says that inflation basically “eats your portfolio” if your investments don’t keep up.
“For example, anyone who had $10,000 in their bank account in the last year, earning 0% APR – which most do – just lost 7.5% of that money, not physically, but in purchasing power. So they just lost $750 and they’re never coming back.”
In other words, if your investments are not earning a higher percentage than the current inflation rate, you are essentially losing money in your portfolio.
6 types of investments that can hedge against inflation
While there is no perfect way to create a portfolio that is 100% inflation proof, there are certain investments that can help you mitigate losses and even profit from circumstances. Here are some of them.
Valuable stocks, especially those held by companies that sell essential goods.
Carey says many people seem surprised when he recommends stocks, as stocks tend to drop slightly during times of high inflation. But what many people overlook, he says, is that some value stocks actually benefit from high inflation.
Value stocks are stocks that can be bought at a relatively low price compared to their future value.
More: Beginner’s Guide to Value Investing
When buying value stocks, Carey recommends choosing those that are associated with companies that sell essentials or things you regularly need (no, wine doesn’t count – we’re talking about toothpaste, toilet paper, etc.).
“These companies sell all these things that people pretty much have to buy, right?” Carey says. “These are not luxury items. It’s the opposite of that. That way their earnings will rise and their share prices will match inflation.”
Some examples of value promotions for companies selling essentials include:
- Clorox (CLX).
- Nestle S.A. (NSRGY).
- Wholesale Costco (COST).
- Loreal S.A. (LRLCY).
- Kroger (CR).
- Target corporation (TGT).
- Procter & Gamble Company (PG).
In addition to buying company shares, you can also invest in these companies through exchange-traded mutual funds (ETFs) such as iShares US Consumer Commodities ETFor Vanguard Consumer Staples ETF. If you don’t know how to invest in ETFs, here is our quick guide to help you.
i savings bonds
Carey says:
“Many investors don’t even know these bonds exist, but they are one of the best investments to hedge against inflation.”
Let’s unpack this.
If you’ve never heard of savings bonds, they are debt securities issued by the US Treasury just like traditional bonds. The difference, however, is that their percentage is a combination of the flat rate plus the current inflation rate (hence the “I” in their name).
I savings bonds pay interest for up to 30 years and they currently carry a total interest rate of 7.12%, according to TreasuryDirect.gov.
The best part about these bonds is that the interest is fixed. Thus, if you buy them today, you will continue to earn 7.12% per annum, even if inflation decreases in a month or two. Plus, they are exempt from state and local taxes, allowing you to maximize your earnings.
The only major caveat is that you will have to wait at least a year to cash them out.
You can purchase e-bonds I through TreasuryDirect.govor on paper using your federal income tax refund.
Treasury Inflation Protected Securities (TIPS)
Like I bonds, Treasury inflation-protected securities, or TIPS, are a type of Treasury bond designed to help investors protect themselves from rising inflation.
But, unlike I-bonds, which accrue interest based on the current inflation rate, when you buy TIPS, the inflation rate is added to your main balance and you earn interest on that amount. In addition, you receive interest on a semi-annual basis.
Let’s see an example of how this would work:
Let’s say you buy $1,000 on TIPS earning 1% per annum. At the current inflation rate of 7.5%, your principal will be adjusted to $1,075. This means you will receive $10.75 every six months if inflation stays at 7.5%.
If you are wondering how the interest rate on bonds of this type is determined, then it is set during the auction (he’s sold). The minimum purchase amount for TIPS is $100 and the repayment period is 5, 10 and 30 years.
The only major downside to owning TIPS is that you will earn less in interest when you deflate.
You can purchase them electronically at TreasuryDirect.govor through a bank, broker or authorized dealer.
Real Estate Investment Trusts (REITs)
The connection between real estate and inflation is quite simple: if inflation is high, the value of the property rises, and with it the rent (usually).
One of the best ways to invest in real estate is through a real estate investment trust or REIT.
A real estate investment trust is a company that owns and sometimes manages various types of income-producing properties. These can be apartment buildings, commercial properties, hospitals, etc.
Carey says that:
“theoretically they are a good hedge against inflation, but the average investor should probably be careful because with REITs you have to analyze them a lot more before investing.”
Why?
Because some of these companies also do real estate finance, and if inflation goes up, the cost of lending will also go up, which can eat into some of your income.
Another thing to consider is that anything you earn with a REIT will be taxed as ordinary income at a rate of up to 37%.
You can add them to your investment portfolio as stocks just like you would with any other public company, but you can also invest in them through ETFs or mutual funds.
More: Investing in REITs: Everything you need to know
Goods
Commodities are an asset class consisting of raw materials or agricultural commodities that can be bought and sold in bulk and are essential for human activities..
Some examples of goods include:
- cattle.
- Cotton.
- Dairy products.
- Precious metals.
- Butter.
- natural gas.
- Coal.
- Lumber.
When it comes to hedge against inflation, Carey says that both gold and anything related to energy are your best bets as they tend to retain and gain the most value.
“In the 1970s, when the US last struggled with severe inflation, the price of gold rose 560%,” says Carey. “Oil stocks also performed very well. Over the past year, Exxon stock is up about 75% or so.”
You can invest in commodities in the form of stocks, ETFs, mutual funds, and through exchange-traded notes (ETNs).
More: How to invest in commodities
Crypto
Before you lash out at me, let me state this: This is still under discussion.
For example, according to Carey, cryptocurrency is one of the most dangerous investments to hedge against inflation due to its volatility, so he urged me to put it at the bottom of the list (I have to).
But many investors argue that because some cryptocurrencies like bitcoin have a limited supply, this scarcity makes them a valuable asset to hedge against inflation.
More: How to Invest in Cryptocurrency: A Beginner’s Guide
If you are interested in adding cryptocurrencies to your holdings, one smart way to use them against inflation is to stake coins.
Staking is the process by which you earn interest for owning a particular cryptocurrency.
In other words, it is like a savings account for a cryptocurrency. The main difference is that rates usually offer higher interest rates than most savings accounts.
One of the best cryptocurrency staking platforms is Celsius. In addition to offering above-average interest rates, Celsius offers a wide range of cryptocurrencies, some of which are even pegged to fiat currencies such as the US dollar and gold. You can check the profitability of each coin here.
Summary
When it comes to inflation, the bottom line is that there is no perfect way to beat it. However, adding some of these assets to your portfolio can help you hedge against it.
Featured Image: SERSOLL/Shutterstock.com
