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Investing in the Inflation Scenario


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For consumers, inflation can mean stretching a static paycheck further, but for investors, inflation can mean continued profit as they add to their retirement portfolio”— Paul Ebeling

Inflation is defined as a sustained increase in the price of goods and services. In an inflationary environment, a gallon of milk that once cost $3 may now cost $4.

Over time, inflation erodes the value of a nation’s currency. There are lots of factors that influence inflation and arguments about its root cause.

About 58% of investors surveyed by UBS said inflation has personally impacted them in the past 6 months. A total of 61% believed inflation would somewhat impact their portfolios if they did not take action.

  • Several asset classes perform well in inflationary environments.
  • Tangible assets, like real estate and commodities, have historically been seen as inflation hedges.
  • Some specialized securities can maintain a portfolio’s buying power including certain sector stocks, inflation-indexed bonds, and securitized debt.
  • Inflation-sensitive investments are accessed in a variety of ways as both direct and indirect investments.

Stocks have a reasonable chance of keeping pace with inflation but not all equities are created equal. For example, high-dividend-paying stocks tend to get hammered like fixed-rate bonds in inflationary times. Investors should focus on companies that can pass their rising product costs to customers, such as those in the consumer staples sector.

Commodities include items like gold, Crude Oil, cotton, soybeans, and orange juice. Like gold, the price of Crude Oil moves with inflation. This cost increase flows through to the price of gasoline and then to the price of every consumer good transported by or produced. Agricultural produce and raw materials are affected as well as automobiles. Since modern society cannot function without fuel to move vehicles, Crude Oil has a strong appeal to investors when prices are rising.

When a currency is having problems, as it does when inflation climbs and decreases its buying power investors turn to tangible assets.

For centuries, the leading haven has been gold and, to a lesser extent, other precious metals. Investors tend to go for the gold during inflationary times, causing its price to rise on global markets.

Gold can also be purchased directly or indirectly. You can put a box of bullion or coins under your bed if a direct purchase suits your fancy, or you can invest in the stock of a company involved in the gold mining business. You can also opt to invest in a mutual fund or exchange traded fund (ETF) that specializes in gold.

Bonds: Investing in bonds may seem counterintuitive as inflation is deadly to any fixed-income instrument because it often causes interest rates to rise. However, to overcome this obstacle, investors can purchase inflation-indexed bonds. In the United States, Treasury Inflation-Protected Securities (TIPS) are a popular option. pegged to the Consumer Price Index.

Real estate is a popular choice because rising prices increase the resale value of the property over time, and because real estate can also be used to generate rental income. Just as the value of the property rises with inflation, the amount tenants pay in rent can increase over time.

These increases let the owner generate income through an investment property and helps them keep pace with the general rise in prices across the economy. Real estate investment includes direct ownership of property and indirect investment in securities, like a real estate investment trust (REIT).

The Big Q: Is crypto good in inflation?

The Big A: Bitcoin backers praise the leading cryptocurrency as an inflation-proof “store of value.” They contend that because the number of coins that can ever be issued is fixed, Bitcoin is not subject to the kind of manipulation practiced by the Fed.

The primary benefit of investing during inflation, of course, is to preserve your portfolio’s buying power. The 2nd reason is that you want to keep your nest egg growing. It can also lead you to diversify, which is always worth considering. Spreading the risk across a variety of holdings is a time-honored method of portfolio construction that is as applicable to inflation-fighting strategies as it is to asset-growth strategies.

Have a healthy weekend, Keep the Faith!

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Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.