People have been all jittery about inflation for some years now. Everyone’s scampering about searching for ways to get strapped before settling in for the impending inflation. For investors, it’s an even scarier nightmare. The inherent need to make intelligent, unpredictable moves that will see your money multiply to help them surpass the cost of living has never been more serious. Planning for retirement, planning passive income and investing require an inflation plan.
Reviewing your investment portfolio late is like studying for an exam the night before you do it; chances are it won’t go well. Inflation is notorious for raising the cost of living for everyone, even those with businesses. Your business might be doing well, but if it is stuck at earning revenue at the rate of inflation, it leaves you with no profits but just enough money to get you through the next day.
Financially comfortable people will also have to make a few adjustments to survive inflation. If the income doesn’t far outweigh inflation and deflation, they become poorer despite making money. The tricky part is using inflation to get richer without resorting to traditional strategies of beating inflation, like saving money at the bank. Making a profit during inflation is primarily based on leveraging and hedging through investments featuring assets that appreciate rather than decrease in value over time
Short-term over long-term
Long-term fixed-income investments are examples of things you want to avoid. They usually have insanely long maturity and payout period but no change in the rates or adjustments for inflation. When inflation hits, the interest rates will rise, and the value of their securities will fall as more people dump it in favor of higher-yielding short-term alternatives. They will only hold your money but give you no profits or meaningful yields in return.
Investing in growth-type stocks and funds, especially in sectors that do well during inflation like energy, commodities for food, technology, and healthcare, is a good move. They can be accessed through ETFs or specific stocks. Once the prices start rising, your value also goes up, and you make more money when you choose to sell your shares.
Holding onto certain real assets like precious metals, which have been favored by inflation in the past, is also a good move since the stocks themselves are volatile, even when the prices keep rising. Energy, however, is a huge earner in the inflationary economy since the prices will hike and take a lot longer to stabilize.
Readjusting debts
Adjustable-rate borrowing works out well during declining inflation. But when the tide turns, interest rates will keep rising, and adjustable rates will follow suit. This means that the interest rates applied to your debts will keep rising as well. Some of the adjustable-rate debts you have around include credit cards, credit lines with your home equity, and an ARM mortgage if you have one.
If you have a hunch that inflation is coming, rolling them over and converting the adjustable rates into fixed rates will see you pay a lot less because your earnings will likely remain the same. If you cannot convert them, go through the paperwork and figure out how far the rates could rise, the repayment period, so you plan effectively. This may not be a strategic move, but more like plugging the leak and not losing the same profits, you earn.
Invest in physical commodities
Historically, certain commodities have been favored by inflation. These commodities, like oil, tend to experience price fluctuations moving with inflation. When inflation rises, fuel costs climb, and since the population needs to commute to work and other places, people and producers will have to adjust to oil prices.
Investing in stocks of companies that deal in oil and gasoline could mean higher returns, especially if you trade in commodity futures. Entry into the commodity futures game could be through publicly traded partnerships which gain exposure through futures contracts and swaps. Tangible assets also hold on to their value much longer during inflation.
Other physical items like gold and precious metals also rise in prices during inflation as people rush to find valuable monetary equivalents to the reduced purchasing power of their paper currency. Gold prices rise throughout global markets as its demand goes up. You can choose to trade in gold shares although having several bullions or coins is much safer and potentially more valuable. The other option is through ETFs specializing in gold. Gold mining stocks may look good, but they are volatile and can sometimes go opposite to the gold prices. A rise in gold prices may not always mean higher stock prices.
Venturing into real estate
Real estate has always worked out well during inflation. People will need places to stay and work in as life must continue even with inflation. Real estate prices tend to increase during inflation, and in doing so, the property’s resale value also rises. Rental income from real estate also spikes meaning the tenants have to pay more.
Making profits from real estate comes from rental income or property securities through REITs. Owning physical property is considered a long-term hedge against inflation as real estate is an illiquid asset, and selling it during inflation would mean a loss. Purchasing property directly like a home through mortgage loans could bring returns through appreciation or renting it out. REITs eliminate the hassle of managing the property and leave you with dividends paid out by the real estate companies that manage the property. Read Passive Income from Real Estate Investing.
Try the stock market
Stocks and equities are as diverse and complex as it gets. However, when looking to make profits during inflation, you are better off staying away from high-dividend-paying stocks. Good stocks are those in the consumer staples sector since they typically pass product costs to customers. When compiling your profitable asset portfolio, some of the stocks to consider are those of;
- Material companies: They have large deposits of raw assets whose prices and values rise during inflation. They also pass on the increased expenditures to the consumers through price hikes experienced in production costs. Holding energy stocks is also profitable since rising energy prices are a primary driver of inflation.
- Financials: yield rates and interest rates are the first to get targeted by the Federal Reserves. The banks and other financial institutions hike their interest rates in response to inflation and to stabilize the economy. This raises their value over the same inflation period.
- Agricultural companies: they produce staple products for the entire population. People will keep buying milk and groceries even if they double or triple in prices. These companies also let the retailers shoulder the costs, who then pass it to consumers. Some good buys also include export and import companies.
Readying your portfolio for inflation is the first step to getting profitable when inflation inevitably comes. Considering the lending and borrowing rates for loans and dividends, mortgages and refinancing options, credit options, and asset classes to get into when analyzing your portfolio will help you protect your cash flow during inflation.
During inflation, making a profit may not always mean investing in traditionally good inflation hedges because times change and the conditions differ. Today’s unique economic conditions could bring unforeseen opportunities from stocks to ETFs and even newcomers like cryptocurrency. But don’t get too caught up in making profits and lower your risk-tolerance guard. While investing, plan for the deflation period as well, don’t get in too deep. Hedge your investments and be responsible. There could be huge profits, but also huge losses so take your time and watch your blood pressure. Also read Beginner Investing for Inflation.
This post was written with the help of Willy Wallace on Fiverr, he’s a business and economics writer. I partner with writers of Fiverr for their expertise so that I can bring you more relevant, specific content. Subscribe for more business, sales and investing posts. Have a lovely day.
