5 Assets To Buy When Inflation Spikes

The golden rule in an inflationary environment is to buy assets because cash loses value, meaning purchasing power is eroded.

Over the past century alone, the value of the dollar has declined by 99%, an astonishing statistic that reveals the importance of allocating savings to hard assets versus keeping it under the pillow, so to speak.

From one year to the next, inflation is not generally easily observed. For instance, if a bag of chips rises from $0.93 to $0.95 over the course of 12 months, most consumers wouldn’t be aware of the price hike.

But over the long haul, inflation takes its toll. For example, the median home price in the US today is $409,000, but 50 years ago the median home price was $35,900.

If all you did was buy a home back then you would have more than 10x’ed your money in 50 years. The problem, of course, is that if you live in that home and want to buy another, you don’t enjoy much benefit at all from those price increases.

The new home you want to purchase will likely have risen by a similar degree. So, what’s the answer? 

Real Estate & Property Investments

If you could buy your home AND the one next door, now you’re able to ride the inflation wave higher as the assets appreciate in value, because one property is your home and the other is your investment.

A common objection to buying property is that the purchaser must go in debt, and if you look at any financial show on TV it will typically advise you to get out of debt as soon as possible. That’s good advice when holding credit card debt or if you have a loan on a depreciating asset, such as a car.

However, if you own property that has tenants in it, debt is arguably your best friend because the tenants pay off the mortgage and you can predictably grow your wealth over time.

Not only does the property appreciate in value as inflation takes hold, but rental payments over the long-term can be increased too while your mortgage rate stays constant – assuming a fixed rate loan.

Some prospective real estate buyers will balk at the hoops that need to be jumped through to own property. Whether it’s getting all your documentation ducks in a row upfront, or fixing leaky faucets, there’s always a reason to shy away from a property investment.

Yet, over the long haul, it has proven to be one of the most effective ways of keeping pace with inflation, as evidenced by the median home price gains over time.

When comparing home prices from one year to the next, it’s easy to get lost in the weeds. Maybe the economy had a particularly good or bad year. Perhaps some exogenous shock hit the economy whether it’s the 2001 attacks in New York or the health scare in 2020.

It’s important, though, to zoom out and observe the long-term trend, which is that a rising tide of inflation will boost property prices, and help purchasers to grow their net worth, especially if tenants are paying off the loans.

Perhaps the most significant risk associated with property is excess leverage. If you can barely afford to put down the downpayment, let alone manage any fixes needed, it becomes tempting to borrow too much.

Should the economy turn south and the property price dip, the risk of going under water on the investment is high. Instead, consider crowdfunding real estate platforms like Fundrise that offer exposure to the real estate sector without the nitty gritty of managing day-to-day hiccups.

Real estate isn’t going to be everyone’s cup of tea, so what other assets do well in inflation?

Treasury Bills

It seems like yesterday when ZIRP, or zero interest rate policy, was the name of the game. So-called “free” money was available. In reality, money could be borrowed not freely but rather at very low rates. Some lucky homeowners locked in 30 year mortgages for 2% and change.

The tide turned in 2022 when the Federal Reserve voted to raise interest rates. For borrowers tethered to variable rate loans, those interest rate hikes act as a drag because more money must go to servicing debt payments. But for savers with cash on hand, treasury bills are well worth considering in an inflationary environment.

These days, short-term 3-month and 6-month Treasury bills that Warren Buffett favors for his massive cash haul on the Berkshire Hathaway (NYSE:BRK.B) balance sheet pay north of 5% annualized.

For the Oracle of Omaha that translates to over $5 billion a year in interest earnings on his massive $100 billion stash of short-term investments.

The average person can benefit substantially too. Where $100,000 in savings parked in a bank a couple of years ago earned next to nothing, today it can produce a $5,000 windfall within 12 months.

Treasury bills aren’t the only type of debt instruments to consider, TIPS are another excellent option.

TIPS

Treasury Inflation Protected Securities, or TIPS as they are better known, are purposely constructed to ensure investors get to ride an inflationary wave without purchasing power erosion kicking in.

Unlike other investments in Treasury bonds or bills, the principal invested in TIPS is variable. At the maturity date, the principal amount will be higher and the investor gets to pocket that difference.

TIPS are an excellent option when inflation really kicks into high gear. By some measures, it already has with 2020 clocking 7% inflation, 2022 coming in just behind that at 6.5% and 2023 so far at 3.7%.

Over the past 3 years alone, total inflation is up around 18%. When inflation rises by such a large amount in such a small time period, most consumers will sit up and pay attention.

For investors, a smart play is TIPS to ensure the effects of inflation do not cause your net worth to go backwards, an example of which is $8,200 could buy 3 years ago what $10,000 buys today.

Exchange-traded Funds

Another asset class that has the potential to perform well in inflation is equities and perhaps the best way to get exposure to stocks is through exchange-traded funds.

At first glance, it might be surprising to discover that equities perform well because most companies have some level of debt, which in turn will accrue higher interest payments as rates rise. But upon closer examination we see a lot of companies, particularly those in the S&P 500 have moats that allow them to pass on the cost of inflation to consumers.

Famously, Warren Buffett has invested in Coca Cola (NYSE:KO) for the reason that its enormous brand permits it to hike prices without hurting demand. Or in other words, consumers are willing to continue purchasing Coke products at the same pace as usual even when management hikes prices. 

For investors that means buying an ETF with exposure to the S&P 500 is among the best bets to stave off the effects of inflation on liquid cash. 

Even Warren Buffett has advocated for his own heirs to buy an S&P 500 ETF over his own Berkshire Hathaway upon his death. Among the most popular S&P 500 ETFs is VOO because of its low expense ratio.

The reason for Buffett’s advice likely stems from a fear Buffett has stated in the past that if a poor leader assumes control of a company (e.g. his own Berkshire) it can be highly damaging whereas the odds of 500 poor leaders gaining control of all of America’s best companies is near zero.

And even then, the nature of the S&P 500 is to kick out poor performers and bring include higher quality companies.

Art

Perhaps a less obvious and easy investment choice is art. Admittedly, art is the domain of the connoisseur more so than the average person, but it has its merit nonetheless.

Three of the most important factors to consider when buying are are: (1) is it authentic and (2) is it scarce and (3) is it created by a renowned artist?

Over time, the most prized pieces of art have soared in price from one generation to the next.

The art essentially acts as a store of value, fending off the effects of inflation. Rather than park a boatload of cash in a money market fund or checking account, a savvy investor can hold wealth in art, which will most likely appreciate in time if it meets the three criteria above. 

Art tends to be the domain of the super rich, so it’s not an option for most.

A Word To the Wise About Precious Metals

We caution against popular inflationary hedges like commodities. A popular assumption is that as money supply grows, so too does inflation, and in turn precious metals should rise.

But history shows during the last 10 plus year when money supply ballooned, inflation did not take hold, and precious metals did not soar as some forecast.

Be wary of such investments because they may lure you in with appealing narratives that simply don’t stand the test of time. Our own analysis suggests that precious metals do best when confidence in government fails, and sometimes these periods overlap with inflationary times, which has caused some analysts to draw incorrect conclusions.

In other words, you can find times when precious metals rose during inflationary periods and times when commodity prices fell, too, as inflation’s grip took hold. But a virtually perfect correlation exists between precious metals prices rising when governments fail or confidence in government is shattered, such as during the Weimar republic in Germany in the 1930s.

In short, if you are considering what assets do well in inflation? Real estate, treasury bills, TIPS, exchange-traded funds, and art are time-tested choices.

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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.