What are the ways to protect your money from inflation? Read on to know.
Learning 12 ways to protect your money from inflation involves considering offshore inflation hedges to safeguard the value of your assets.
If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44-7393-450-837).
Introduction
Inflation is defined as the pace at which the value of a currency falls and, as a result, the overall level of prices for goods and services rises. Inflation is a normal occurrence in an economy, however inflation hedging may be utilized to counteract the predicted loss in the price of a currency, therefore safeguarding the diminished buying power.
Inflation hedging can also help safeguard the value of an investment. Although many investments appear to produce a good return, they might be sold at a loss when inflation is taken into account.
A prudent investor may prepare for inflation by focusing on asset types that outperform the market during inflationary periods. Although classic bonds are the most common choice for income investors, they are not the only investment that generates a cash stream.
In March 2022, the inflation rate reached 8.5 percent (according to US Labor Statistics consumer price index data), the highest since 1981. Consumer goods costs appear to be on the rise for the foreseeable future.
Such large surges in inflation lead to market volatility and economic instability, causing havoc in the conventional stock market. As a result, investors seek new investment possibilities to assist them hedge against the dangers associated with growing inflation.
12 Ways to Protect Your Money From Inflation
These are the twelve ways to protect your money from inflation. Although each entails a different level of risk, it is still possible for an individual investor to make it.
1. Invest in Alternative Investments to Diversify Your Portfolio
Cash is one of the most inflation-sensitive asset types. For instance, if you have $500,000 in cash and the inflation rate is 8.5 percent, your purchasing power will decrease by $42,500.
To prevent such financial losses, invest in alternate forms of financial products, such as:
- Real estate
- Oil
- Gas
- Fine wine
- Alternative mutual funds
These alternatives are typically less susceptible to market fluctuations.
For instance, the fine wine asset class has shown to be an excellent inflation hedge, exhibiting steady growth even during times of economic unpredictability.
It is also among the greatest alternatives to expensive goods. Fine wine portfolios climbed by 5.28 percent in the past year, although the S&P Global Luxury Index fell by 8%.
Investing money in real estate infrastructure and real estate mutual fund setups is another method that many successful investors (such as Warren Buffet) utilize to protect themselves against inflation. This is so because infrastructure investments often maintain their worth despite inflation.
2. Invest in Real Estate
Inversión inmobiliaria has a lot of benefits. This asset type offers stable income through dividends and has inherent value. Due to the constant need for housing, regardless of the state of the economy, and the fact that as inflation increases, so do property values and rental rates, it frequently serves as an excellent inflation hedge.
However, real estate is illiquid because it is a tangible asset. Real estate investment trusts (REITs), which are more liquid investments that can be bought and sold easily in the markets, are an alternative to take into account. Companies that hold and manage portfolios of industrial, residential, and commercial buildings are known as REITs.
They frequently offer better returns than bonds and generate income through leases and rents. Another major benefit is that because of their relatively stable operational costs, their prices are likely to be less impacted when interest rates start to climb. The Vanguard Real Estate ETF is an illustration of a REIT with extensive exposure to real estate and a low expense ratio (VNQ).
3. Consider Bond Investments such as Treasury Inflation-Protected Securities
Inflationary pressures have a significant impact on fixed income markets. So, instead of investing in fixed income equities, consider investing in bonds, which are often less inflation-sensitive. Even though bond rates are substantially lower, this asset class may help investors diversify and balance their portfolios.
Furthermore, TIPS (Treasury Inflation Protected Securities) bonds are inflation-proof since their principal increases as the inflation rate rises.
While they are more expensive than regular bonds (since they provide inflation protection), they are appropriate for short to medium-term financial gains. TIPS are also a suitable alternative for those approaching retirement age who wish to avoid putting their money at risk.
4. Make Tax-Efficient Investments
Consider maximizing tax benefits on all of your investments. You can accomplish this by utilizing several tax-efficient investing strategies such as:
- Investing in assets that lose a smaller percentage of their returns to taxes in taxable accounts
- Investing in assets that lose a higher percentage to taxes in tax-advantaged accounts
5. Reallocate Your Funds to Stocks
If inflation returns, the bond market will normally suffer, but the stock market may benefit. Consider shifting 10% of your portfolio from bonds to equities to capitalize on this potential trend.
A 60/40 stock/bond portfolio is considered a prudent, conservative stock/bond mix. The Dimensional DFA Global Allocation 60/40 Portfolio (I) (DGSIX) is an example of a stock/bond portfolio.
A 60/40 stock/bond portfolio is a simple investment strategy that will help you buffer against inflation, but keep in mind that it will underperform an all-equity portfolio over the long term due to the impact of compounding interest. You may lose out on returns when compared to a portfolio with a larger percentage of stocks.
Another option is to purchase preferred stock. These liquid securities will provide a greater yield than most bonds and may not depreciate as much as bonds when inflation occurs.
Utility stocks are a third option in which the stock price rises and falls in a reasonably predictable manner over the economic cycle while also paying consistent dividends.
6. Buy Bank Loans
When prices are rising due to inflation, some firms can prosper. Banks, for instance, benefit from the higher cost of loans and boost their revenue as interest rates rise.
Purchasing senior secured bank loans is a smart approach to increase yields while preventing price drops in the event that interest rates start to increase. However, keep in mind that there can be a significant lag before the value of loans rises when rates climb. The Lord Abbett Floating Rate Fund is an illustration of this kind of fund (LFRAX).
7. Look for Consumer Staples Stocks with Strong Pricing Power
Consumer necessities like energy and food have significant pricing power. This is because they can simply balance any additional expenses by raising prices without impacting demand.
As a result, consumer goods stocks have remained constant despite rising prices. So, during times of inflation, investing in commodities equities is usually a safe bet.
8. Avoid Investing in Businesses that have High Labor Costs
Companies that rely on their personnel, such as healthcare and retail, aim to raise pay during inflationary periods in order to keep and recruit people. These increases are intended to keep pace with rising consumer-goods prices. However, rising salaries drive even bigger price increases, resulting in a downward spiral of inflation.
Furthermore, most experienced investors, such as Warren Buffet, avoid investing in such companies since they require massive capital infusions to keep afloat during economic downturns.
When selecting company stocks, make sure to research the company and comprehend its reliance on its workforce. In times of inflation, look for companies that don’t require a lot of capital to offset rising labor costs.
9. Avoid High-growth and High-Risk Stocks
Companies that rely on interest rates for rapid expansion are particularly vulnerable during periods of inflation. This is because the Federal Reserve of the United States routinely raises interest rates to discourage borrowing during periods of high inflation.
As a result, rising interest rates may have a detrimental impact on emerging enterprises.
If you’re looking for promising high-growth companies, be sure their expansion is fueled by consistent operating leverage. These companies often have steady stock prices and are less influenced by rising inflation and the resulting interest rate hike.
10. Keep Track of your Spending and Make an Effort to Save
The rise in the consumer price index reflects an increase in commodity costs. And rising prices reduce your purchasing power while increasing inflationary pressure.
Simply start keeping track of all your spending and strive to:
- Find less expensive substitutes for some of the items in your shopping.
- Do without some of the less important items you buy on a regular basis.
- Set a monthly budget and attempt to stick to it.
11. Open a Savings Account
Even during periods of rising inflation, opening a savings account is a good method to earn interest on your money. Simply create an account and deposit at least six months’ worth of funds into it.
Earning a small interest rate is preferable to receiving none, despite the fact that the majority of traditional savings accounts do not offer extremely high rates.
As an alternative, you may try looking for online savings accounts, as these occasionally provide interest rates that are far greater than the industry standard.
You can also put money into a certificate of deposit if you’re trying to save for a short while.
12. Examine Previous Inflation Trends
Researching past high inflation tendencies can help you detect certain present and future inflation patterns. Among these patterns are:
- Outstanding performance of commodity stocks
- Energy industry stability
- Bien performance of real estate and other alternative asset classes
Reflexiones finales
Every investor is subject to the risk of inflation. Money tends to depreciate with time, and the amount of inflation in an economy varies according to current affairs.
However, there are other strategies available for investors to protect against inflation, including specialized investments and asset classes that have been hedged against inflation. Your portfolio can grow regardless of the economy if you keep an eye on certain assets and buy them when inflation starts.
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Adam es un autor reconocido internacionalmente en temas financieros, con más de 830 millones de respuestas en Quora, un libro muy vendido en Amazon y colaborador de Forbes.
