This is a guest post by Rose Donner on investments and inflation. Enjoy!
It used to be a sure thing in life that you would have to deal with three things: death, taxes, and inflation. With the markets constantly in flux due to geopolitical activity and regular unrest in the world, protecting your portfolio from disappearing was more than enough to keep you busy.
Inflation is a fact of life, though, and letting it slide while you deal with the bigger fires on the stove can be dangerous. Luckily, there are a few things that you can do to protect yourself from inflation while still building your portfolio. Making the right decisions with your investments can help you mitigate the inflation risk before it becomes a big problem.
6 Proven Investments to Minimize Inflation Concerns
While inflation is never going to go away completely, it should not be a major concern when you are watching the market for how your money is doing as you near retirement age or are projecting your future financial needs.
There is truth in the fact that as time goes on, the cost of living increases. This is measured through a few ways, including the Consumer Price Index, or CPI. The CPI raises approximately 3.5% every year, making your cost of living exponentially higher if you plan on retiring in 20-30 years.
Smart investors will consider this when they make their investments. By using these six strategies, you can minimize the impact of inflation on your money.
- Invest in short-term bonds to avoid high interest rates and inflation. Bonds are a definite aspect of most people’s portfolios by the time they retire. This provides the owners with a fixed income when the bonds pay out in coupons over a set amount of time. Short-term bonds limit the exposure to inflation because when they run out, you can take that money and purchase new bonds at a higher interest rate.
- More aggressive bonds are riskier, but carry the potential for higher benefits. Bonds like high-yield or emerging market can generate a high income, cancelling out or at least padding you from the increased cost of living. A smart portfolio will include high quality bonds mixed healthily with aggressive ones. This helps you continue to have an anchor in your investments while also giving you the chance to make higher returns.
- Investing in stocks helps protect you from inflation. Stocks and bonds are different, but both hold a strong place in a healthy portfolio. Stocks pay out in dividends rather than fixed amounts. Investing in a company for their dividend payout is saying that you trust that over time, their profit will increase, and so, too, will your dividends.
When this happens, your cash flow increases, which protects you from the rising cost of living.
Stocks also provide you the opportunity to grow your portfolio. The stock market has a generally upward trend, so if you diversify your portfolio with a mixture of stocks, your ultimate growth will likely be higher. But there is risk in any investment, so stocks should not be your primary hedge against inflation.
- Tangible assets such as real estate are good areas to invest in. Some areas of the world automatically have high price tags associated with their real estate. Others have land and homes that can be bought cheaply with the hopes that property value will increase over time.
- Real estate is one area where the increase in prices has stayed relatively on par with the rise in inflation. Purchasing land or other property to invest in or buying rental property can be a solid part of your portfolio and an excellent way to mitigate inflation prices.
- Investing in gold or silver will never steer you wrong. No matter what else is going on in the stock market, gold and silver always stays strong. During inflation, many investors will purchase the metals, in turn causing the prices to rise. Buying in the off-times can help you hedge your investments from the pain of inflation.
Gold prices are often volatile, but they have also retained their value throughout history. Unlike paper currencies, there is security in owning gold. The value of the dollar or other currencies can be a weakness, and when it begins falling, people flock to purchase gold and silver instead.
Sales of gold bullion from global central banks have accounted for much of the gold supply that has been actively sold since the 1990s. This has slowed considerably as stores of gold bullion have decreased along with the annual gold-mining output. The law of supply and demand applies strongly here – when there is lower supply but a higher demand, the price will rise. The gold you own will be an excellent hedge against inflation.
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Bonus Tip: Pad your portfolio by investing in oil. The price of oil is fluid, moving along the same path as inflation rates. Fuel is necessary for almost every aspect of living, so oil is an excellent area to invest in. This is especially true during signs of rising inflation. Investors will jump to grab any potential oil investment opportunities when it looks like inflation is in the near future. The same holds true for other goods that are necessary for regular living standards, like cotton.
You Don’t Need to Stress Inflation if You Prepare For It
Knowing it is coming is the key to preparation, and inflation has been steadily rising and monitored over decades. Ignoring it is going to mean you face it head on painfully in the future, but preparing for it today means you do not have to deal with it later.
A solid portfolio will contain a good mix of aggressive bonds, anchor bonds, stocks, and tangible items such as gold and silver, real estate, or oil. Make smart decisions today so your investments pay off down the road.
—Disclaimer: Guest Posts are published periodically on IKIGUIDE to ensure diversity of perspectives. By featuring these opinions, we are by no means promoting or endorsing them. This post is simply to share information. Please use your own discernment before investing. IKIGUIDE will not take liability for any losses incurred as a result of advice provided in this post.–