Best Investments To Beat Inflation

by | Aug 19, 2022 | Inflation | 0 comments

Welcome to the Topic “Best Investments To Beat Inflation”

The majority of Americans now view price inflation as an unavoidable aspect of everyday life. You hear about inflation in the news and see it when you go to the grocery store. Hopefully, you've given some attention to how inflation affects the returns on your investments.

Chris Berkel, investment advisor and founder of AXIS Financial in Edmond, Oklahoma, has the following to say about inflation: “Inflation is the quiet wealth killer.” Even if investors have been successful at generating good returns year after year, their portfolios could nevertheless see their purchasing power decrease due to the effects of inflation.

In order to avoid falling behind, your long-term investments will need to provide a return of at least 3.7 per cent annually, which is the average rate of inflation in the United States going back to 1960. Take a look at several investments that have shown to be effective over the long term in assisting investors in fending against inflation.

Beat Inflation by Investing in Gold

Gold is the most traditional form of protection against inflation. Over the course of the twenty years, between September 2001 and September 2021, the price of yellow metal increased by an average of 9.48 per cent each year. During the same time period, inflation ran at an annualised rate of 2.4 per cent, giving investors a rate of return of 7.08 per cent.

Simply put, you shouldn't go and invest your entire life savings in gold just yet since there are certainly other aspects of gold investment that you will need to be aware of.

Despite the fact that investing in gold-focused mutual funds and exchange-traded funds (ETFs) can greatly lower these costs, it is essential to keep in mind that the price of gold is quite volatile, particularly over the short term.

In addition, you will need to determine whether the fund you choose attempts to replicate the price of gold or the performance of gold mining firms. Both of these strategies have a chance of being profitable in the long run, but the returns could be very different.

Best Investments To Beat Inflation

Invest in Stocks to Beat Inflation

The best defence against inflation is a well-diversified stock portfolio, which may be obtained by investing money. The S&P 500, considered a significant benchmark for U.S. stocks, had an average yearly return of roughly 11 per cent between July 2012 and July 2022. (with dividends reinvested). Even after taking inflation into account, you're still looking at around 8.3 per cent on an annualised basis for average returns.

Even with today's significant price increases, you would still be much ahead of inflation if you did the following: The overall rate of inflation was approximately 2.9 per cent higher on an annualised basis between July 2012 and July 2022.

To profit from this kind of historical development, there is no actual requirement to select particular equities, which can require a significant amount of research and be fraught with incredible danger. To get started, select either an S&P 500 index fund or an S&P 500 exchange-traded fund (ETF), both of which track the performance of the index and keep costs extremely low. They offer basic diversification at a minimal cost and contain hundreds of different equities, which helps reduce risk and the number of difficulties associated with portfolio management.

Remember, trading in stocks is never risk-free. When you invest in stock index funds, you don't get a say in which firms the fund puts its money into, and this could result in a loss of money in the near term. Consider investing in an environmental, social, and governance (ESG) fund rather than traditional mutual funds if you're concerned about avoiding morally questionable businesses and keeping your money away from them.

Beat Inflation with Real Estate

Despite the fact that the scale and diversity of the market can make it very difficult to generalise about this particular asset class, many investors who are concerned about inflation turn to real estate as a way to hedge their holdings.

According to research conducted by the Massachusetts Institute of Technology (MIT), retail property has been shown to be the category of real estate that has performed the best in terms of outperforming inflation, while apartment complexes and industrial assets performed somewhat less well. When determining what kind of real estate performed the best over the long run, the MIT investigation took into account the growth of inflation, the costs of maintaining the property, and appreciation.

Depending on the conditions of the local real estate market, the ownership of single-family homes can provide a hedge against inflation. The overall value of homes in the United States has increased by an average of 4% yearly since 1991. However, this data does not take into account the costs of maintenance or any other expenses.

The problem with purchasing real estate is as follows: It calls for significant upfront investments in addition to a wide range of fees for financing and upkeep. Because of this, real estate investment trusts, sometimes known as REITs, can offer normal investors a straightforward method for diversifying their portfolios and gaining the benefits of real estate related to protecting against inflation.

Purchasing a share in a mutual fund that solely invests in real estate is analogous to investing in a real estate investment trust (REIT). Regulations require them to make consistent dividend payments, which makes them particularly enticing to investors seeking income.

Additionally, REITs have a long history of delivering superior returns. The MSCI U.S. REIT Index has generated an average yearly return of more than 10 per cent over the course of the past decade. That is an excellent strategy for warding off inflation.

Best Investments To Beat Inflation

TIPS Are Designed to Beat Inflation

Treasury Inflation-Protected Securities, more often known as TIPS, are designed to shield the value of your investment from the effects of inflation. The United States Treasury Department sells Treasury Inflation Protected Securities (TIPS) and increases their par value annually to account for inflation. Your interest payments will increase as a result of this, and it also ensures that you will most likely see some appreciation as a result of inflation adjustments.

TIPS can be enticing due to the fact that they offer protection against inflation; nevertheless, it is important to keep in mind that their primary function will be to maintain buying power rather than necessarily generate growth. The iShares TIPS Bond ETF, designed to replicate a TIPS index's performance, generated average annual returns of a little over 3 per cent over the past decade.

If you invest in TIPS, you will also need to be aware of the possibility of deflation. Despite the fact that you will never receive less than the initial par value of a TIPS when it matures, the value of the TIPS may nonetheless drop while you are receiving interest payments.

Beat Inflation with I Bonds

I bonds, also known as Series I Savings Bonds, are a type of government-issued security issued to combat inflation.

Similar to TIPS, they make regular interest changes based on the current inflation level, which helps to maintain the purchasing power of your money. They will not adjust the par value of your bond like they do with TIPS; rather, they will adjust the interest rates on your bond every six months based on the level of inflation in the economy.

That might turn out to be a really good move for you at this point in time. A 9.62 per cent interest rate will remain in effect until at least October 2022. But the interest rates on I bonds are always changing, and they can even reach zero. If interest rates were to fall, this would imply that even if you are assured not to lose the initial investment, it is still susceptible to being eroded away over time by inflation.

In addition to this, bonds typically have quite stringent lock-in dates. After purchasing an I bond, you will have to wait at least a year before you can cash it out, and for the next four years, you will incur a penalty equal to three months' worth of interest if you cash it out early. This works very similarly to a certificate of deposit (CD).

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Also Read: 5 Smart Strategies to Deal With Inflation

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