Best Way to Beat Inflation

Best Way to Beat Inflation

Welcome to the Topic “Best Way to Beat Inflation”

Everything, from your groceries to your gas, will become more expensive as the purchasing power of money decreases due to inflation. Inflation is a hidden killer of budgets. Your purchasing power will decrease by 2% to 3% in a year that is considered to be healthy; however, inflation is hanging at 9% right now, which is the most it has been in the past 40 years.

In the current hysteria about price hikes, it is easy to forget that not every household will be equally affected since not everything is being affected in the same way. However, this is because not everything is being affected in the same manner. Your individual financial situation is one of a kind, and the rate of inflation varies depending on a number of circumstances, such as whether you purchased a new or used vehicle, how frequently you hit the road, and whether you are married or live alone.

In light of the current circumstances, taking out loans is one of the options available to combat the effects of inflation. Even when compared to the level of inflation, interest rates are still quite low. A sound housing market can be profited from in a straightforward manner through the use of a mortgage. If the Federal Reserve decides to raise interest rates in response to rising inflation, it is possible that the cost of borrowing money will become less appealing.

Eighty per cent of the assets that we assess in accordance with our long-term projections regarding the capital market are expected to generate returns that are more than the rate of inflation. Investing any additional money you have in a portfolio that

corresponds to your financial goals and the amount of time you have available to achieve those goals is the easiest method for safeguarding your purchasing power.

The main objective of investing in stocks is to outpace inflation by placing your money in the stock market. When you don't invest, your purchasing power declines (a dollar buys less gasoline, for instance); thus, your investments should increase to keep up with the increased prices.

Growth vs Value Stocks

We must understand that Value and Growth Investing are opposite stock investing strategies. Instead of valuing businesses on their past or present earnings, Growth Investment bases company valuations on their predicted future earnings.

Inflation is the process through which money that will be worth less in the future depreciates in Value today. Future income, therefore, has less Value during periods of rising inflation, whereas current income has a correspondingly larger value.

Due to the above, Value Equities should do better during inflationary times than Growth Companies, and vice versa; since value stocks are valued based on their near-term profitability.

We might be approaching a phase where Value Investing triumphs over Growth Investing, which would be a change from what has been happening over the previous several years. This is foreseeable, as inflation has reached multi-decade highs across the U.S., U.K., and other developed countries.

The forecast that Value would beat Growth in an inflationary climate has also been confirmed by the S&P 500 index, which is the largest market in the world, according to the latest data for the year to date.

Best Way to Beat Inflation

Buy Value Stocks

A decent inflation hedge may be to purchase value stocks now, especially if the potential company benefits from an inflationary economy. Elon Musk said that when inflation is high, investing in stocks of companies you believe provide high-quality items rather than in dollars is better.

Among the value stock categories, utility companies typically outperform others in terms of acting as a hedge against inflation. Utility equities are less prone to market volatility and more likely to pay dividends.

Many value equities tend to profit from rising inflation more than growth companies. Value stocks frequently have substantial cash flows, albeit they might change over time. Growth stocks are currently more susceptible to the negative effects of rising interest rates due to their interest rates.

Value stocks typically sell for $50 or $60 per share on the American market, but their true Value is at least double that. As inflation slows the cash flows of speculative growth stocks, top U.S. hedge funds have begun to shift their attention to value stocks.

Make Tax-efficient Investments

Investments in stocks can serve as an inflation hedge. However, consider reducing overhead costs by focusing on tax-efficient investments to further economize. To do this, you can use a variety of tax-efficient investing strategies, such as:

  • Placing assets in taxable accounts that lose a smaller proportion of their earnings to taxes
  • Storing assets in tax-advantaged accounts to reduce their tax liability.

Companies with High Labor Costs

Companies that depend on their personnel, including those in the healthcare and retail industries, aim to raise pay during inflation to keep and recruit workers. These increases seek to keep pace with rising consumer goods costs. However, inflation spirals out of control as prices rise even further in response to rising salaries. Additionally, most seasoned investors, including Warren Buffet, steer clear of such businesses because they need a significant infusion of capital to survive during economic downturns.

Make sure to research the organization and comprehend how dependent it is on its workforce before selecting company stocks. Aim to invest in businesses that don't need a lot of capital to offset rising labour expenses during inflationary periods.

Best Way to Beat Inflation

Avoid Risky, High-growth Stocks

Rapidly expanding businesses that depend on interest rates are particularly vulnerable to inflation. That's because the U.S. Federal Reserve often raises interest rates to deter borrowing during times of increased inflation. The higher interest rate might also have a negative impact on new businesses.

Make sure the Growth of any potential high-growth company is supported by consistent operating leverage. These businesses often have steady stock values and are less impacted by rising inflation and the ensuing increase in interest rates.

Maintain a Balanced Investment Portfolio

When investing, it's crucial to have a varied, well-balanced portfolio. Start with wide, inexpensive index funds that follow significant stock market indices or the entire stock market.

Understanding how inflation affects your portfolio is always beneficial as the first line of protection against potential harm you would otherwise experience. Investment in stocks is one of the best ways to beat inflation. Make sure you are aware of your investment hedge choices so you can protect your portfolio from any negative effects before inflation significantly reduces your purchasing power.

Have any questions regarding the topic “Best Way to Beat Inflation” feel free to comment below.

Also Read: How to beat inflation 2022

How to beat inflation 2022

How to beat inflation 2022

Welcome to the Topic “How to beat inflation 2022”

In March 2022, the rate of inflation, as reported by the US Bureau of Labor Statistics, reached a level that was the highest since 1981. The inflation rate is calculated on the Consumer Price Index, and it would seem that the upward trend in consumer product prices will persist for the foreseeable future.

Most Americans consider price inflation an inevitable part of daily living.

To beat inflation in 2022, your money thus needs to be invested in returning a high yield and acting as a hedge against rising costs of living.

A carefully crafted strategy for a balanced investment portfolio may be pursued in order to beat inflation. Investments can be split evenly into two broad categories: Alternative Investments and Investments in Equities and Bonds.

Alternative Investments include Real Estate, Commodities Market, Art and expensive Wines, Equities and Bonds; on the other hand, they include shares of companies and Government sponsored bonds that are more directly tied to economic activity, and interest rates would likely outperform.

Diversify through Alternative Investments

It is important to note that inflation is always present in a healthy economy because a low and stable inflation rate is ideal for economic growth, with central banks typically aiming for a rate of approximately 2%. But with inflation figures touching 7 % in the current year, the topic of investing against inflation has gained increasing traction.

Large investors in alternative investments are ultra-high-net-worth individuals, defined as those with a net worth of at least $30 million. According to a Motley Fool survey, these individuals will have 50% of their assets in alternative investments in 2020.

Alternative investments are no longer just available to the extremely wealthy. The typical investor can now purchase shares in fine wine and spirits, real estate, art, and other collectables, as well as cryptocurrencies. Examples of assets that historically have held their value during times of inflation include Gold, silver, and real estate. However, Alternative investments come with their peculiarities, such as:

  • Physical alternative assets are by definition illiquid, which might be problematic if money from the investment needs to be retrieved fast.
  • Owning physical assets may also involve paying for maintenance costs and insurance in case the object is damaged. After all, climate-controlled art storage facilities and wine cellars aren't free.

beat inflation

Real Estate as Alternative Investment

Although making broad generalizations regarding any specific asset class can be challenging, many inflation-averse investors use Real Estate to hedge their holdings.

Retail property has proven to be the greatest Real Estate sector for beating inflation, according to a study by the Massachusetts Institute of Technology (MIT), while apartment complexes and industrial assets performed just marginally better. The MIT investigation sought to determine what kind of Real Estate fared best over the long term by considering inflation increases, maintenance expenses, and value.

Depending on the state of the local housing market, owning a single-family home can act as a hedge against inflation. According to the Federal Housing Finance Agency, since 1991, the average yearly growth rate for property values in the United States has been 4%; maintenance or other costs are not taken into account in this data.

The issue with purchasing Real Estate is as follows: Large buy-ins are necessary, and there are several expenditures associated with financing and upkeep. Because of this, Real Estate Investment Trusts (REITs) can offer a convenient option for common investors to diversify their portfolios and benefit from real estate's benefits for inflation hedging.

It's similar to purchasing a fund that only holds Real Estate assets when you invest in REITs. As a result of regulations requiring them to do so, income investors find them particularly alluring.

And historically, REITs have delivered impressive performance. Morgan Stanley’s MSCI US REIT Index has experienced an average yearly return of more than 10% over the past ten years. That is a fantastic strategy to combat inflation. Consider stocks of consumer staples with high pricing power.

Commodities as Alternative Investment

According to the S&P GSCI, a Commodity Index, commodities – the basic resources used to make consumer goods – returned 37.95 per cent in 2021. Since the cost of raw resources also climbs along with the price of consumer goods, commodities have historically been one of the most reliable hedges against unexpected inflation.

Investment in Gold as a commodity has always been a favourite. In times of stress, uncertainty, and, yes, rising inflation, investors worldwide turn to Gold. Given its rarity and great demand, Gold's price is likely to continue to increase. It has been increasing ever since the release of COVID-19 and increases even more during periods of economic instability like this one.

Purchase Digital Gold or Gold Exchange-Traded Funds (ETF) to gain exposure.

beat inflation

All investors have access to a wide variety of ETFs that follow commodities. You can also purchase stocks that are closely correlated to particular commodities, such as agricultural or mining stocks.

Despite having a reputation for being a secure store of wealth, especially in times of inflation, Gold had a bad year in 2021, with a 6 per cent loss. One must be conscious that the notion of Gold being a hedge against inflation is unfounded, and stocks have regularly outperformed the precious metal.

Other Commodities to choose from as a form of alternative investment include fine wines, art / Non-fungible Token (NFT) based art, and other precious metals such as Copper, Zinc, Oil etc.

Diversify Investments in Stocks and Bonds

Alternative investments aren't your only option for inflation protection. You may be confident that a diversified portfolio of stocks and bonds will see you through periods of inflation, albeit with some instability, if you don't wish to go into the worlds of commodities, wine, and art.

Investing in Stocks

In conclusion, stocks can help you weather periods of inflation — as long as you hang on — while producing great long-term returns and avoiding the drawbacks of other assets.

According to some research, value Equities typically perform better than Growth Stocks during periods of inflation. Value Stocks are businesses with high earnings in comparison to their present share price. They also have a reputation for strong cash flows, which investors favour when prices rise.

Contrarily, Growth Stocks typically exhibit a greater sensitivity to changes in interest rates, which is a typical monetary policy reaction to inflation. Growth stocks had a great decade since inflation was noticeably absent at that time. Value stocks, however, have recently made a resurgence. Their success is likely to continue, given the existing circumstances.

How to beat inflation 2022

Investing in Bonds

Bond investments such as Treasury Inflation-Protected Securities (TIPS) may be considered.

Another asset issued by the Government with the goal of outpacing inflation is the Series I Savings Bond, also referred to as ‘I Bond’.

Like TIPS, ‘I Bond’ maintains the buying power of your money by making periodic interest adjustments based on the rate of inflation in effect. They don't alter the par value of your bond like TIPS do; instead, they adjust the interest rate every six months in line with inflation.

Until at least October 2022, interest rates are set at 9.62 per cent. These days that might go pretty well for you.

However, ‘I Bond’ interest rates might go to zero and fluctuate frequently. This implies that even if you are assured not to lose your initial investment and interest rates fall, they could still be eroded over time by inflation.

Additionally, ‘I Bond’ have rather lengthy lock-in dates. Similar to a certificate of deposit, you can't cash out an ‘I Bond’ until at least a year after purchasing it, and for the next four years, you'll be penalized with three months of interest (CD).

In the opinion of many experts and economists, Equities are a stronger long-term portfolio hedge, especially against an unanticipated spike in inflation. When inflation is higher, corporate profits frequently increase more quickly since this shows that consumers are spending more and the economy is expanding. The stock market, as represented by the S&P 500, has increased on average by 10% yearly during the previous 100 years, despite its ups and downs.

Have any questions regarding the topic “How to beat inflation 2022” feel free to comment below.

Also Read: How Inflation Could Cause A Stock Market Crash!!

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