With the Federal Reserve’s recent move to pump another $1 trillion dollars into the US economy, the possibility of rising inflation is highly likely if not imminent. Simply put, inflation happens when prices rise due to the falling inherent value of a currency and usually occurs when the government prints money it does not have. Inflation is harmful because prices rise, but wages do not rise as quickly.
Inflation is also harmful to investments and savings. In order to actually grow your money, your money must grow at a faster rate than the current inflation rate. When your money grows at a rate slower than inflation, you are actually losing money because your $1 today will purchase less in the future.
For this reason, your investments must beat inflation. Gold is usually a popular investment to combat inflation because it is a precious metal that holds it’s value and will appreciate relative to currency. Gold is a decent investment, but I prefer the following four investments for inflationary times: real estate, commodities, stocks in the consumer goods sector, and foreign investments.
Real Estate
Real estate is usually a great investment at anytime, and even better during rising inflation because nobody is making any more land. There is a limited amount of land in the world (or given country) and no more is being created. So if you buy real estate at the price today, the property will retain its inherent value and appreciate with inflation. Combined with population growth and increased housing demand, real estate in general has the potential to easily beat inflation.
If you cannot or do not want to purchase real estate outright, you can purchase REITs instead. REITs (Real Estate Investment Trusts) are securities like stocks that can be purchased through stock brokers that are invested in real estate, kind of like a real estate mutual fund. REITs are great because they enable you to make any size investment into real estate and can be liquidated at any time.
Commodities
Commodities are basic resources (timber, cotton, copper, gold, rice, oil, etc.) that’s price is determined by the market for the resource as a whole. Commodities are considered to be of the same quality across their market. Commodity positions can be taken by purchasing the physical commodity through a registered broker, by purchasing ETFs (Exchange Traded Funds), or by purchasing mutual funds.
You can purchase physical commodities through a National Futures Association registered broker. Find out more at the NFA’s website. ETFs are similar to mutual funds but can be purchased like stocks through any stock broker. And mutual funds that contain commodity positions can also be purchased through most stock brokers.
Because commodity markets can be quite volatile and it is recommended that commodities make up no more than 5% of your investment portfolio (including investments in gold).
Consumer Goods Sector Stocks
Since the price of goods increases during times of inflation, owning stocks of the companies that sell the goods whose prices rise the fastest is also a way to keep pace with inflation. These companies will benefit from the increased prices by having increased revenue. Of course the buying power of their money will also be affected by rising inflation, but if their good’s prices are rising at the same or higher rate than inflation, you will theoretically be able to keep pace with or beat inflation by holding that company’s stock. Of course, there are many other factors such as current stock price, company earnings, the overall strength of the company, etc.
Generally the goods with the largest price increases are in the consumer goods sector. Most consumer goods are everyday goods that everyone uses in good times and bad, i.e. food, cleaning supplies, personal products, etc, so there is always a demand for them. Examples of these companies are Procter & Gamble (PG), Colgate-Palmolive (CL), Kraft Foods (KFT).
Another good investment is high yield dividend stocks and funds that make high dividends. With these you can receive good return rates with a high degree of certainty on your return.
Foreign Investments
The foreign investment idea is to put your money in an investment that is not tied to the U.S. dollar (or other currency with rising inflation). This can be accomplished by investing in foreign currency, foreign companies, mutual funds comprised of foreign companies, and other ways.
When investing in U.S. companies, or companies with a large presence in the U.S., the majority of that companies assets are either in U.S. dollars or based on the U.S. dollar which are affected by inflation. By investing in foreign corporations and/or corporations that do significant business in other currencies, you avoid total exposure to the U.S. dollar. Foreign economies, stock markets, and tax laws vary from country to country, so be sure to do your homework when investing in foreign companies.
Taking Action is Most Important
High inflation can erode wealth over the years, so beating inflation is very important. Adjusting your portfolio to combat inflation earlier rather than later can make a big difference as interest rates of savings accounts, checking accounts, money markets, and CDs are paying very low interest rates. This can be as simple as gradually shifting a portion of your 401k portfolio into foreign mutual funds or as complex as directly purchasing a combination of the investment vehicles above. In the end, remember to consult a financial adviser before making any financial decisions.
Disclosure – I do not currently own any shares of Procter & Gamble, Colgate-Palmolive, or Kraft Foods.
Have a fantastic day!
Comment from Mike Harmon
March 22, 4:30 pm
Where did you get your blog layout from? I’d like to get one like it for my blog.