Inflation isn’t just scary for consumers who are watching their grocery bills and other expenses soar over the summer of 2022.
It’s also an uncertain time to be an investor, with growing inflation threatening to wipe out investment gains the longer it goes on.
However, there are some moves you can make right now to protect your portfolio from the harmful effects of inflation.
Here’s what you need to know about inflation today, the recession it could possibly be helping to usher in in the U.S., and the 8 best investments for inflation protection.
Why Every Investor Should Be Thinking About Inflation
Inflation is a natural part of the modern U.S. economy.
We’ve all experienced inflation over our lifetimes as prices have gradually increased.
As natural as it is, it can also be problematic for investors. Inflation decreases buying power. For assets with fixed interest rates, the outcome is less potential income. Income potential decreases further and further as interest rates increase.
This is why it’s so important that investors consider inflation, especially when it’s high.
To combat the decreased buying power of inflation, investors must focus on return targets that match or exceed the rate of inflation.
For example, with an average inflation rate of 4% (which is pretty on the money), investors should strive to create a portfolio of assets that returns at least 4% every year.
Inflation in 2022 — A Whole ‘Nother Beast
As mentioned, inflation is normal.
In fact, it’s even a good thing — an indicator that the economy is on the up and up.
But, as with many things, it’s only good in moderation.
The current rate of inflation (over 10% as of June 2022) is neither moderate nor normal. This high and rapid rise in inflation isn't just quickly devaluing purchasing power, it’s negatively impacting the value of already-purchased investments.
How did we end up here?
Several unprecedented events have conspired to increase demand at a time when supply has been uniquely limited.
COVID-related shutdowns and the Russian-Ukraine War both majorly impacted supply chains around the world. All the while, in the U.S., stimulus-focused government policies and rising wages have empowered a high rate of consumption. As demand has greatly outpaced supply, inflation has risen.
As a result, the Federal Reserve (aka the Fed) has not-so-slowly bumped up interest rates in order to slow spending, drop inflation, and “cool” the economy.
That’s the reason behind why we’re seeing such high interest rates today. Together, all of these factors are working together to pressure an economy that’s already very volatile, and has been pretty much since COVID hit.
Many economists believe the fallout from this pressure could be a recession.
This makes it even more important that investors like you put their money into assets that will keep generating returns and maintaining wealth as inflation, as well as economic uncertainty, grows.
Diverse Investments: The Best Method for Keeping Pace With Inflation
We already explained how fixed-rate assets don’t fare well in an inflationary environment. But in addition to that, the correlation between stocks and bonds tends to increase as inflation increases. That means, the higher inflation rises, the more critical it is that you’ve diversified away from just traditional stocks and bonds.
Before we get to describing some of the best alternative assets to add to your investment portfolio to increase diversification, there’s an important distinction we must make.
For investors nearing retirement who don’t already have a diverse asset mix, if you’re still investing, now is a good time to gradually add in the following inflation-resistant assets.
But for those who are further from retirement, stocks are still a high-earning asset class over a long enough period of time. So if you’re in that group, definitely don’t go dumping your stocks just yet. But do go ahead and consider adding some of the following assets to your portfolio to keep up with, or even outpace, inflation.
8 Best Investment Types for Keeping Up With Inflation
Finally, it’s time to talk about the best types of inflation-resistant assets for a variety of goals and situations.
Foreign Currency: When Inflation is U.S.-Specific
Right now, high inflation isn’t necessarily a U.S.-only phenomenon. But, during times when it is, the U.S. dollar can get weaker.
In these situations, investing in non-U.S. currency will increase your portfolio diversification and ability to ride out an uncertain economy.
Start investing in foreign currency (aka “forex” or “FX”) by opening a brokerage account then purchasing options, futures, or ETFs (exchange-traded funds).
ETFs: A Less-Volatile Commodity Investment Vehicle
To expand upon ETFs, this asset class (like its relative the mutual fund) is a highly-diversified investment vehicle. Because of the variety contained in an exchange-traded fund, it offers more stability than you might get when investing directly in a commodity.
So if you’re interested in generating returns from goods such as wheat, oil, or gold — consider ETFs in times of especially high volatility and inflation.
REITs: Real Estate is Always in Demand
Real estate investment trusts (REITs) are organizations that purchase, own, and manage real estate investments. These funds are typically financed by several investors, each of whom gets dividend payouts as the property produces income.
REITs offer inflation resistance because the price of real estate, and rents, tend to go up as inflation goes up. Plus, real estate is one asset that will always be in demand as long as people need a roof over their heads.
Real Estate: An REIT Alternative for Hands-On Folks
If you prefer to own a physical asset, instead of investing in an REIT you can purchase actual property.
The value of physical property tends to go up with inflation, just like the value of REITs does. And, again, real estate is one of those things that will pretty much always return value.
Income is generated from real estate assets by renting them out to individuals or businesses. Of course, there is a bit more management associated with property than there is with REITs. Namely, physical property needs to be kept up, and there needs to be some kind of system in place for sourcing and managing renters.
Treasury Inflation-Protected Securities: Literally Made for Inflation
Treasury inflation-protected securities (aka TIPS) are bonds with principals that rise and fall at the same rate as the consumer price index. In other words, they were actually created to cope with inflation.
TIPS pay interest twice a year at a fixed rate that coincides with the current principal. Therefore, payments go up as inflation goes up, and down as deflation takes place. So not only are TIPS inflation-proof from the ground-up, they’re also handy for investors looking for cash flow.
The downside to treasury bonds is that their returns are usually lower than traditional securities when inflation is low. And, unfortunately, if sold before fully matured the return on TIPS could be lower than your initial investment.
Gold: Great for Matching Inflation
Gold is perhaps the most popular inflation hedge.
That’s because the value of this asset that captured the interest of Americans back in the Gold Rush days has historically kept up with inflation.
However, the downside is that gold doesn’t offer compounding returns and doesn’t actually move all that much when the economy is stable, so you can’t count on it for super high growth potential.
To get into gold, you don’t have to buy the precious metal itself if you don’t want to. Other choices include gold ETFs and commodity futures and options.
Stocks: Steady Returns, On a Long-Term Scale
Like we mentioned in our note for long-term investors earlier, stocks are a totally viable investment in a diversified portfolio as long as your portfolio has time to ride out spikes in inflation.
In the decade between July 2012 and July 2022, the S&P 500 generated an average annualized return around 8% when accounting for inflation. When you consider the inflation average is still around 4% in the U.S., that’s certainly a satisfactory performance.
"I believe historical evidence shows yet again why equities should form the foundation of any investment strategy,” said director of global macro at Fidelity, Jurrien Timmer. “Equities offer growth potential, a store of value, and some measure of protection against inflation, not to mention the magic of compounding.”
The best stocks to invest in during a time of massive inflation are those in the commodity and necessity sectors. Businesses in these sectors in which you can purchase stock include healthcare companies (like Pfizer), food companies (like General Mills), and utility companies (like American Water Works).
Just like real estate, the world is always going to need items in these industries!
Yourself: Always a Great Investment
Finally, we’ve come to the most creative asset type of all — you!
The wildly-wealthy and well-recognized investor Warren Buffett said in a 2009 shareholder meeting that the best way to invest against inflation is to invest in yourself.
As long as you have built up the skills that keep you relevant, you’ll be able to ride out most negative economic situations.
As Buffett said: “If you’re the best teacher, if you’re the best surgeon, if you’re the best lawyer, you will get your share of the national economic pie regardless of the value of whatever the currency may be.”
Track Your Diverse, Inflation-Proof Portfolio With Kubera
We’ll be the first to admit that if you’re going to be an active investor in even half of the assets above — and we do recommend being more attentive than usual during uncertain economic times — you’re going to need some management help.
Kubera is here to do just that.
We built Kubera’s personal balance sheet software to help modern, diversified investors handle any and every asset in their portfolio.
From your bank account(s) to precious metals, currencies of all kinds, real estate, bonds, vehicles, crypto, stocks, EFTs, NFTs, and more — the assets and institutions we support are practically innumerable.
But while our underlying tech is complex, that doesn’t mean your experience using Kubera will be.
Seriously — sign up for your simple subscription and have all your assets tracking in Kubera in just hours! Account-based assets (like bank accounts) update in real-time. And for those assets without accounts (like your collectibles), the easy-to-use interface makes it simple to keep all their details up to date.
Now for a feature that’s especially important when we’re talking about outpacing inflation — monitoring IRR for investments.
IRR stands for internal rate of return, a metric that’s even better than ROI because it also accounts for cash flow changes and holding time.
Just make sure an asset’s current value, purchase price, and cash flow details are all up to date in Kubera. Our smart platform will add in holding time to instantly display your IRR in your preferred currency!
We created this feature because we understand how essential it is to see easy-to-digest investment returns when optimizing your portfolio against loss.
To bring the performance of your overall portfolio as well as each individual asset into full view to ensure you’re hitting your return goals, simply navigate to the recap view in your Kubera dashboard.
There, we crunch all your data for you so you can always see your yearly, monthly, weekly, and even daily performance metrics.
You don’t have to take our word for it on how many awesome features Kubera has to make it easier for modern investors to handle pre-recession conditions.
Work with a financial advisor or wealth manager of some sort? We made it easy to share password-protected elements of your Kubera instance with them. Alternative, you can actually access Kubera through your wealth professional — for a discount! — when they integrate our white-label features into their client-facing portal.
No matter how you choose to use Kubera, we’re here to make investing and portfolio management delightful even when inflation rates aren’t.