Best Investments For Inflation Protection

Which Assets and Investments Do Well In Inflation? During times of high inflation, it’s important to make sure your investment portfolio is structured so as to capitalize on the upside that market-wide rising prices can bring.

There are some investments which tend to do better in this environment than others. Here are some of the main ones:

Property and Real Estate Investment Trust (REITs)

Incomes derived from Real Estate holdings generally do well in times of high inflation. As inflation goes up, so too do property prices generally. Rental payments also rise as well, giving landlords the ability to calibrate lease payments inline with growing inflation.

There are many ways to benefit from property investments without having to own your own Real Estate portfolio. REITs are one such option, in which investors can buy a stake in a trust-managed pool of income-generating property, gaining a dividend on the profits made from the Real Estate held.

REITs like Simon Property Group (SPG) are also able to invest in a wide variety of property types – often the kinds of real estate that wouldn’t be accessible to an individual investor, including medical premises, warehouses, hotels, data centers and whole apartment buildings.

This inherent diversity within the portfolio makes investing in real estate with a REIT more resilient to other negative markets factors too.

Commodities

A commodity is a kind of basic fungible good that is normally used in the production of other goods further down the line in a manufacturing process. 

Commodities, like Copper, are a good investment option for those seeking to gain from inflation because their current trading values are often predictors of rising inflation to come. An upward trending commodity price will drive up the cost of those other products made from the raw commodity itself, which is often a driver of the rising inflation itself.

Therefore, owning a diverse selection of commodities during an inflationary period protects from the effects of inflation later on in the market cycle.

The S&P 500

Any market index comprising a large number of stocks is usually a good way to profit off of rising inflation levels over the long-term. 

The S&P 500, however, is particularly useful here because its historic return has even outpaced that of inflation.

The index is a weighted measurement of the largest companies listed on various stock exchanges in the United States. Investors can either trade the companies themselves, or they can invest in one of the many individual Exchange-Traded Funds (ETFs) out there on the market.

Collateralized Loan Obligations

Leveraged loans are high-risk lending instruments used mainly by companies and institutions that have poor credit scores or are already heavily in debt. The chances of these organizations defaulting on their loan obligations are high, and so the rate at which they borrow money is accordingly more expensive.

And because this type of loan uses a floating rate yield, they are seen as a good option for when in times of high inflation. The investor, or backer, of these loans receives a higher-than-average return on their money via a scheduled debt payment, but assumes more risk from the underlying nature of the asset. 

Best Investments To Hedge Against Inflation

The best performing assets during a time of low, stagnant, or even negative inflation are often fixed-income investment vehicles and other cash-based interest-generating holdings. These assets will increase in value as the spending power of money goes down. 

However, the converse occurs during rising inflation, where the spending power of a unit currency decreases and the value of cash savings can be wiped out.

Because of this, some investors look for an asset that is a strong asset against currency deflation – and the traditional answer to this has always been gold.

Why Gold?

The belief in gold as a hedge against inflation isn’t going anywhere, and it is considered the go-to asset to protect against declining fiat currencies the world over.

But investor’s faith in gold might not be fully warranted. The precious metal can be highly volatile when it comes to price action, fluctuating in value quite wildly over sometimes sustained periods of time, and thus not an easily realizable asset when needed.

Furthermore, physically holding gold can be difficult and expensive, and this has to be factored into its usefulness as a hedge against rising prices.

However, gold has performed well against other precious metals recently, beating both silver and palladium of late. 

So, if gold is not the best hedge against inflation, what is? 

Enter, Treasury bonds…

Treasury Inflation-Protected Securities (TIPS)

In terms of pure peace of mind and guaranteed returns, nothing has historically beaten Treasury bonds.

A T-bond is a long-term sovereign debt instrument issued by the US government. The bonds come to maturity sometime between 10 and 30 years, upon which the investor receives a par amount depending on the initial principal.

Bonds have done well over the last few decades, but the attractive coupon rates of years past may be over. Still, there is another Federal government-issued security that is good: TIPS.

TIPS are a form of security that are indexed to inflation so as to ensure that investors are protected from the worst effects of declining spending power.

The obvious risk with TIPS is that they are not particularly lucrative when inflation rates are low, and they are not as profitable even when inflation is high as other government bonds on offer. They are also taxable under certain circumstances.

Best Investments For Inflation: The Bottom Line

There are some specific companies that often outperform the market in times of inflation. However, good portfolio strategy is more important here, and ensuring a diversified selection of share options is key.

First off, when inflation occurs, it makes sense to transfer some of your bond investments into stocks. This way, the more liquid publicly traded companies can benefit from rising price action and gain you a more positive return.

Second, invest in international markets. Not all inflation is global, and by buying into multiple territories, you will shield your assets from the worst performing of these countries. On the flip side, you might not capitalize on the most opportune moments, but again, this is a hedge strategy, not an optimization.

Finally, when you do choose your stocks in an inflationary cycle, choose ones in non-discretionary sectors. The auto-parts and auto-repairs space is a typical example of an essential service, as are medical providers and infrastructure companies.

By being exposed to firms that must continue to operate regardless of market conditions, you can leverage the fact that these operations will pass on the cost to customers and insulate themselves from the downside of doing business in a high-price environment.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.