If you’ve decided to try your hand at investing, you probably feel like you need to wait for the perfect time to enter the market. However, there is truly no perfect time to enter the market, and investing during inflation is definitely possible.
What is Inflation?
Inflation is the decrease in purchasing power of a particular currency over time. It can be viewed as both positive and negative depending on your viewpoint and the rate of change. For example, those with tangible assets may like slight inflation, as it increases the value of their assets.
As a currency loses its value, prices will rise and the currency can no longer buy the volume it once could. This impacts the general cost of living for the majority of the population and leads to deceleration in economic growth.
Should I Invest During Inflation?
As with most investments, the answer to this question lies within your personal finances and financial goals. While it is a higher risk to invest during inflation, there are a few investment options experts suggest in order to protect your money from rising inflation. They include:
- Short-term bonds
- Real estate
Treasury inflation-protected securities, or TIPS, are treasury securities issued by the United States government. These particular securities are indexed to inflation in order to protect investors from a decline in their purchasing power. As inflation rises, TIPS adjust in principal amount, or price, in order to maintain their real value instead of increasing their yield. With TIPS, an investor will never receive less than the original principal amount. TIPS bonds pay interest twice a year at a fixed rate and at maturity, investors are paid either the adjusted principal or original principal, which is greater.
Cash is often overlooked when discussing investments during inflation. While cash is not a growth asset, it will typically keep the pace of inflation in nominal terms if short-term interest rates are also rising. The economy can be unpredictable, and experts agree that keeping cash on hand in either a high-yield savings account or a money market account is important during inflation. While having too much cash can be a risk to finances, it’s recommended to set aside six to nine months’ worth of expenses depending on if you are a single or double-income household.
Short-term bonds work similarly to cash in the sense that your money is safe and accessible. These financial investments are easily converted to cash, typically within 5 years but are often sold after only 3-12 months. Unlike long-term bonds, short-term bonds are more resilient to high-interest rates and can be reinvested at a higher rate as they mature.
Investing in stocks during inflation can be beneficial long-term, but can suffer from short-term inflation spikes. When thinking about stocks, especially during periods of inflation, be careful not to make drastic changes in your portfolio that can hurt your overall performance if inflation suddenly drops.
Real estate does traditionally well during high inflation periods since the value of property usually increases. As property values increase, a landlord is able to charge more for rent in order to increase their income so that it is on pace with the rising inflation. However, there are other ways to invest in real estate besides simple homeownership. You can also invest through Real Estate Investment Trusts, also called REITs, or through mutual funds that invest in REITs.
Many people consider gold to be a relic that no longer holds the monetary qualities it used to, but it can be used to preserve wealth in economic environments that are faced with a decreasing dollar and rising inflation. When inflation rises, gold typically appreciates and therefore can be considered a hedge against inflation. The reason for this is that gold is a globally priced asset, and gold investors must sell their U.S. dollars to make the transaction. In addition to using gold as a hedge against inflation, gold also increases in value over time and is a long-term investment.
Commodities, such as oil, metals, and agricultural products typically increase with inflation, so investing in them can be a good hedge against it. However, they depend largely on supply and demand, making them highly unpredictable and overall high-risk investments.
Cryptocurrencies such as Bitcoin are described as ‘digital gold,’ but it is unclear if they are a good inflation hedge over time. They are very volatile and can be difficult to incorporate into diversified portfolios.
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