With the stimulus checks still coming in and the economy slowly picking up from the pandemic, inflation is rising. Most economists had already predicted this but aren’t sure how much inflation is going to affect the market. A stable inflation rate of 1-2% is manageable. We’re up at about 4.2% last April. And don’t this isn’t that alarming yet, we don’t know how high it can get. What we do know that it’s already here and it’s something we can’t stop individually. What we can do is to minimize its influence on us.
First of all, let’s talk about the definition of inflation. According to Investopedia, “Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.”
Luckily for us, there are many ways to beat inflation. And like a savvy investor you should be, please take time to weigh in the pros and cons of each and try to diversify where you put your money. Never let your money sit around doing nothing for you.
You work hard for the money so let your money work hard for you.
Our Choices
Minimize your available cash
Yes, we know cash is king. But in times of inflation (to hyperinflation), your money today is constantly losing value every day. It’s better off to put your money somewhere else. What options do we have then?
Convert your cash into another currency. For USD, you can check foreign exchange and hedge your dollar against another fiat like the British Pounds, the Australian Dollar or an Asian currency with very low inflation in their country.
Gold (or other Precious Metals)
Gold has always been one of the go-to investments. Gold doesn’t lose its value and steadily increases in value over time. During times of economic turmoil, gold is also considered one of the best investments to put your money in. But gold also comes with its own problems. Gold is not as easy to liquidate as you’d want it to be.
Stocks
At about 8% annual gains for the S&P 500, it will surely outpace a 4.2% inflation in the US. You could pick your own stocks if you’re willing to risk for higher gains. But for regular investors who prefer to passively invest, they can always go for index funds tracking the S&P 500. The beauty of stocks is that it’s almost as good as cash. Liquidation is easy. Of course, its drawback is that it also goes up and down in value. Your best bet is that your stock’s value go up higher than inflation, thus diversify.
Foreign Stocks
If our stock market is in a slump, then the next best thing to invest in another country’s index fund. Just find a country with good enough returns compared to the US and you’re good to go. Or, buy available ETFs from the usual financial institutions like Vanguard, Fidelity and Charles Schwab that invest in international markets.
REITS/Real Estate
They say that in times of inflation, it’s better to have assets you can physically hold. The first one is gold and the other is real estate. Real estate has always been one of the top investment instruments of all time. Prime land can only appreciate in value. Real estate gains may also reach sky-high. But the pandemic has changed the way real estate works. It has made real estate lose value especially for rentals like apartments and commercial lots/buildings. A lot of businesses have been hit by the pandemic. No tenants = no cash flow. And like the problem with gold, real estate can’t liquidated easily.
TIPS (Treasury Inflation-Protected Securities)
As the name goes, TIPS are the exact financial instruments designed to hedge against inflation. Treasury Inflation-Protected Securities are US treasury bonds that are indexed to inflation. This ensures protection against any sudden inflation. Payouts are given twice a year at a fixed rate. On maturity dates, the principal amount given back is adjusted depending on inflation. TIPS come in 5, 10, and 30-year maturities. The only cons about TIPS is that you’re going to have to wait for maturities and that interest rates are on the low side compared to all the other things mentioned here.
So there you go. These are our favorite options to battle inflation. It’s inevitable that inflation would go up, our hope is that the economy normalizes again and that inflation would stabilize at the 1-2% level, a sign of a good economy.
For now, we’re going to have to have to control the things we can do something about which is to hedge against inflation.