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Inflation has been wreaking havoc on the U.S. economy since the coronavirus pandemic. The government’s consumer price index increased by 9.1% from June of 2021 to June of 2022. The increase was the largest year-over-year jump experienced in the U.S. since the 1981-82 recession.
The price of energy became an issue after the Russian invasion of Ukraine. At their peak, energy prices increased by 42% from the same time during the previous year. A jump that severe hasn’t been experienced since 1980, when the Iranian Revolution significantly reduced oil production.
Economically, last year was tough, but this inflationary period is worse than it’s been in more than 40 years. Consumer purchasing power is much lower than it’s been in decades, and there’s no telling when it might get better. Higher prices might feel a little bleak, but the current inflationary environment is not completely hopeless.
There are a few moves that you can make that can protect your money from inflation and possibly net you a profit in the long-term.
What are the best investments to make during inflation?
Inflation is a completely normal occurrence for the economy. While a 9.1% increase is extremely high, the annual inflation rate typically averages somewhere around 2%. In some cases, the inflation rate can be negative by the end of the year. However, that’s uncommon, and you should plan for at least a 2% inflation rate each year.
The best option for keeping up your personal finances when inflation rises is to keep a percentage of your money in long-term investments as part of a diversified portfolio.
Retirement accounts, for example, are commonly used as a way to grow your money slowly over time and keep up with the natural rise of inflation.
The problem is that you can’t access these accounts until much later in life. If you’re looking for inflation protection in the short-term, then you’ll need to seek an alternative method.
Here are six of the best investments that you can make during times of high inflation. Most of these options are generally solid investments, but can be especially safe during inflationary times.
1. Real estate
Real estate is almost always an excellent investment and should be at the top of your list. Under normal circumstances, commercial real estate is the most lucrative investment opportunity. However, the last few years have been anything but “normal circumstances.”
Work-from-home and hybrid work schedules might become the new standard, so commercial real estate is currently in limbo. On the other hand, residential real estate is a white-hot market right now and could be where you should focus your attention.
Since 1991, the average annual growth in home value has been about 4%. That’s more than enough to cover the average annual rate of inflation. Another benefit is that rent prices have been skyrocketing. You can buy a new home for yourself, rent your current one, and charge a considerable amount of money each month.
Naturally, some risks are inherent when owning multiple properties. The cost of financing the purchase and routine maintenance may mean that you likely won’t see a profit for quite some time. Also, there is always the risk of another housing market crisis like the one in 2007-2008.
The good news is that you don’t have to take on these risks alone. Real estate investment trusts (REITs) are publicly owned companies that own real estate and mortgages.
By investing in one of them, you’ll be able to experience the potential windfalls of real estate without buying any property. The money pooled together can lead to larger purchases with much lower personal risk.
2. Savings bonds
The U.S. Treasury sells savings bonds that are designed to earn interest based on a fixed rate and one that’s adjusted for inflation. The interest rate is set once every six months and will be altered based on the current rate of inflation.
For example, the current interest rate for an I-Bond is 9.62% and is set through October 2022. The rate will either be increased or decreased based on the current state of the economy in the fall.
The good thing about I-Bonds is that they are both short-term and long-term investment opportunities. An I-Bond will only earn interest for 30 years, but you can cash it out after a year if you would like.
However, if you cash it out before five years, then you’ll be assessed a penalty of three months of interest. But after five years of purchasing your I-Bond, you can cash it out with no such penalty attached.
Stocks are one of the most common investments in the U.S. While you might become a billionaire, you might also lose a lot of money by making bad investments. Buying stocks is the riskiest option on this list, but the potential gains make it worth talking with a brokerage firm or investment trading company.
The key to investing during times of high inflation is to look for options where consumers can offset the higher costs. For example, utility stocks commonly pay dividends to their shareholders that can provide you with passive income.
The profits are less susceptible to market instability. Rising costs typically mean rising prices for consumers, so profits are almost always in the black.
Another solid investment strategy is to get involved with a stock index fund. These options are available as mutual funds or exchange-traded funds (EFTs) and follow a specific index such as the S&P 500 or Nasdaq 100. The money you use to purchase your index fund is used to invest in all the companies involved with that specific index.
Your fund will be highly diversified, which can significantly mitigate the risks during inflation. Plus, you’ll be able to get involved at a much lower cost than if you wanted to buy individual stocks in each company.
4. Silver and gold
Silver and gold are precious metals that have been used as currency as a means of exchange for centuries. The U.S. dollar was backed by gold until August 15, 1971, when President Nixon officially abandoned the gold standard. In the decades since, silver and gold have remained strong investments for many people.
The best time to buy silver or gold is when the currency is losing value during times of inflation. When the dollar weakens, commodities become more expensive (more on that later).
Historically, silver has performed better than gold during inflation. However, gold is the more expensive option and roughly 70 times more expensive than silver. It might be a good idea to invest in both to help hedge your investment.
You’ll have two options for investing in silver and/or gold: to physically buy some or invest in ETFs that track them. Physically purchasing silver and gold can be risky unless you know what you’re doing.
You’ll need to be careful and make sure that what you’re buying is worth the price that you’re paying. On the other hand, investing in an ETF can be a much safer bet, and you won’t have to worry about storage.
As mentioned earlier, the price of commodities typically increases dramatically during periods of higher inflation. This creates a unique investment opportunity that can be extremely lucrative when handled correctly. However, it’s important to note that the price of commodities is determined by supply and demand. It’s just as possible that you could lose money by investing in commodities.
The key to investing in commodities is timing. Raw materials such as oil, natural gas, grain, beef, coffee, cotton, soybeans, and copper have all experienced an increase in value over the last few years.
In particular, the price of oil skyrocketed after the Russian invasion began in late February 2022. A lot of people made a lot of money by investing in oil as a commodity just before prices jumped.
The same was true for the price of wood. The supply chain for wood and other building materials was severely disrupted by the pandemic. However, the demand stayed roughly the same. As a result, the price of wood skyrocketed, and shrewd investors were able to make an enormous profit.
Unlike silver and gold, most other commodities have an expiration date. It would be ludicrous to purchase a ton of avocados and attempt to sell them for a profit. Look into ETFs that track specific commodity indexes. You can safely experience the potential windfalls of a price increase without the risk of being stuck with expired commodities.
Cryptocurrency is a digital currency that records transactions onto a digital ledger known as a blockchain. It’s quite a bit complicated and is still a very new investment opportunity compared to the other options on this list.
There is a lot that remains to be seen about how cryptocurrency holds up against inflation. It’s a very high-risk investment option, but it also has the potential to be a very high reward.
The primary reason that cryptocurrency can be such a lucrative investment is because of a limited supply. Cryptocurrency mining is very costly and doesn’t come with immediate rewards. As a result, the market isn’t flooded with a ton of new cryptocurrency which means the existing cryptocurrency holds its value very well.
Another benefit is that cryptocurrency is decentralized and isn’t controlled by any government or financial institution. The lack of oversight makes it quite a gamble to invest in (as recent markets have shown) but allows for a much higher reward.
Invest today to protect your money from high inflation
A global pandemic caused the entire world to change how it functioned overnight and lasted for more than two years. Society might be slowly returning to normal, but the economy is going to take a little while longer, particularly for those on a fixed income.
Inflation has been hitting hard lately and is impacting practically every part of daily life. The storm won’t last forever, but it could stay a while and do some serious damage while it’s here.
Protect your bottom line. Investing in some of the six opportunities listed above can help you to keep your money safe. You can weather the storm of inflation and maybe come out the other side with a solid profit.
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