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.
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.
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.
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.
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