In today’s turbulent economic conditions, investments are essential for safeguarding your future. The right types of investments can be a great source of passive income. Also, they help grow and diversify your income, as well as maximize your retirement savings.
But there are various factors that can take a toll on the overall value of your investments. One of the most common phenomena that could derail all your investments is an unprecedented inflation spike.
COVID-19 and Inflation: The Real Picture
Have you been noticing that the prices of various essential commodities have soared over the past year? That’s partly because of the pandemic-driven inflation surge. With businesses shutting down and governments announcing various COVID-19 relief funds, hyperinflation could be lurking just around the corner.
In fact, the Consumer Price Index (CPI) has already risen 5.4% between June 2020 and June 2021. That’s significantly higher than the Federal Reserve recommended 2% spike for a healthy and stable economy. Economists and financial experts have already warned against a massive post-COVID inflation surge.
That means whichever currency you’re investing in, it’s likely going to lose part of its value in the future. This, in turn, could lead your investment earnings to plummet.
Inflation: A Necessary Evil
It’s worth mentioning here that not all inflation is harmful to the economy. As mentioned earlier, the Federal Reserve targets a 2% annual rise in CPI to keep the economy afloat and minimizes the value of national debt.
Also, a slow and steady increase in consumer prices is inevitable as people skyrocket their income and acquire more spending power.
But a rapid and unpredictable rise in CPI can result in rampant inflation, which in turn, makes currency values take a southward turn. It skyrockets the prices of various commodities and takes a toll on your investment portfolio. Ultimately, it results in a severe economic crisis.
For a regular consumer, inflation means increased prices of goods and services, higher interest rates on loans, and diminished savings. But for investors, the consequences of inflation are more significant.
Depending on your investment portfolio, an inflation spike could plummet the returns you earn from different sources. As your currency loses value, it effectively reduces the interest rates on bonds and mutual funds. Similarly, it takes a toll on high-dividend stocks. All these factors adversely affect your investment portfolio.
But that doesn’t mean inflation is an investment apocalypse. While investment assets can never be 100% immune to inflation, some of them are designed to better withstand the consequences. As an investor, it’s up to you to make the right kind of investment.
In the following sections, we’ll discuss a few effective ways to invest your money to protect yourself against a potential inflation spike. Let’s get started.
Inflation-Resistant Investments: A Closer Look
An unexpected inflation surge is every investor’s worst nightmare. But it’s worth remembering that certain types of investments are inherently equipped to provide high returns even during a period of economic crisis.
If you’re worried about where to put your money during the post-COVID inflation, here are a few useful ideas:
1. Growth-Oriented Stocks
The stock market has always been a safe haven for novice and seasoned investors alike. But unlike income-oriented stocks, growth-oriented stocks aren’t designed to pay high dividends.
Instead, they offer the potential for higher price gains in the future. Typically, these stocks are associated with companies that can continue to maintain or raise their product prices despite inflation.
For instance, companies in the healthcare and pharmaceutical sectors have witnessed massive growth during the COVID-19 pandemic. These companies haven’t just stayed afloat during the pandemic; they’ve thrived and even maximized profits by escalating product prices.
That means the stock prices of companies in these sectors have skyrocketed as well. Investing in growth-oriented stocks for such companies ensures that you continue to earn returns during inflationary periods.
Other industries that tend to weather the wrath of inflation include construction, food, technology, and energy. For instance, oil prices have continued to rise despite the pandemic-driven economic crisis. This, in turn, means investing in energy stocks right now is a smart move.
If you’re planning to invest in growth-oriented stocks, make sure you stay abreast of the latest stock market news. Also, find a reputed and trustworthy stock trading platform that isn’t out to get your money. Lastly, avoid making any drastic, panic-driven changes to your trading strategy, just because of the looming fear of an inflation spike.
2. Treasury Inflation-Protected Securities (TIPS)
TIPS or Treasury Inflation-Protected Securities are a special type of bond issued by the U.S. Treasury Department. What sets them apart from other bonds is that the Treasury Department adjusts the TIPS interest rate for inflation.
These bonds mature over a period of 5, 10, or 30 years, and pay a fixed interest twice a year. Also, when TIPS mature, you get back the adjusted principal or original principal, whichever is higher.
That means if you invest in TIPS, you’ll never have to bear losses due to potential inflation in the future. While they offer lower interest rates than other bonds, they’re a safe and stress-free way to protect your investments against inflation.
3. Real Estate
Here’s the thing – between 1990 and 2020, the U.S. dollar has halved in value. But median home prices in the U.S. have nearly tripled during the same period. Also, rent for a two-bedroom apartment in 2020 is nearly four times the value in 1990.
It isn’t surprising considering that housing will always be an essential human need, irrespective of the economic forces at play. So, consumers will always be willing to keep a roof over their heads. That’s the reason home prices have continued a steady climb during the pandemic as well.
That makes real estate investments ideal for withstanding the effects of inflation. If you’re already a homeowner, you could consider buying a second rental property. Apart from being a clever investment, it’ll also help you earn passive income.
Additionally, you can invest in real estate investment funds (REITs) or short-term crowdsourced loans that fund real estate projects.
The decentralized nature of cryptocurrencies makes them immune to the repercussions of inflation. Also, considering that they aren’t controlled by any federal authority, the government can’t manipulate the value of cryptocurrencies.
That means investing in cryptocurrency could be a wise move to weather an inflation storm. But you should keep in mind that there isn’t enough data to analyze the performance of these currencies during periods of hyperinflation. Also, keep an eye out for various types of cryptocurrency scams.
If you sense an inflation surge lurking around the corner, consider investing in assets that’ll withstand the economic crisis. Growth-oriented stocks and TIPS provide a safe way to earn higher returns during inflationary periods.
Similarly, real estate investments will yield returns despite the economic forces at play. Stay abreast of the real estate and stock market news to avoid making any miscalculated changes to your investment portfolio.