How to Invest Like a Pro During Times of Inflation

With the markets coming and going in cycles of highs and lows, it is best to know how to invest in every situation.  And with some experts saying high inflation is on the way, it is about time you learn how to invest during times of inflation.

Inflation can destroy the returns on your assets and can severely affect your cash flow.  Which could be a huge problem, especially, if you are retired and depending on your portfolio to pay the bills.

That's why it is so important to learn how to invest for inflation, if you want to ensure that no matter the economy, you will always have money and be able to make money.

What is Inflation?

Inflation is the general rise in the prices of goods over time.  This increase in costs leads to a decline in purchasing power of a given currency.  Thus, it will take more money than before to purchase the things you want and need.

There are a few factors that can cause inflation.  One being a sharp increase in demand without an increase in production.  When this happens, people are willing to pay more for the product and so the price of it goes up.

Also, if the costs to produce the product goes up, then those costs are passed on to the consumer and the price of the product increases as well.

While these factors tend to cause more local inflationary problems, there is one thing that can cause inflation on a more global scale.  And that is by dramatically increase the money supply or making money easier to get.

With more money in circulation, the value of the money drops.  If the value drops, then it will cost more to buy everyday items.  And if even more money is put into circulation, this makes the problem even worst.

The Causes and Effects of Inflation

During inflation, the value of the dollar decreases as the prices of commodities begin to rise much faster than your salary.  These rising prices not only decrease your purchasing power, i.e. you can't buy as much as you could before for the same price.  But it also affects your investments.

And, for the average investor, it affects it pretty negatively as rising prices of goods tend to erode the investor's profits.  Because now that $1,000 in dividends you earn every year, is actually only worth about $900.

This is really bad for retirees. Who unlike most of us, may be depending on that extra source of income from their portfolio to cover their living expenses.

Going into an inflationary period can cause the FED to raise interest rates in efforts to control the inflation.  Sadly, this tends to have a negative effect on the market as a whole because some businesses will decrease spending and hold off on expansion.

This means decreased revenue and profits which causes the value of their stocks, and your portfolio, to fall.  Plus, as interests rates increase the bond market is hit pretty badly as bond values plummet.

How to Invest During Times of Inflation

With such grim prospects during times of inflation, it might seem impossible to make any money from investments.  But, thankfully, that just isn't true.  You can make money in any and every kind of economy.  But, you just have to know how everything works.

Stocks

Typically, during inflationary periods the stock market tends to take a big blow.  But there are some stocks that benefit greatly during times of inflation.  And these are financial stocks, commodity stocks, and some tech stocks.

While lots of stocks will drop during inflationary periods, stocks in which the price increase can be passed on to consumers will benefit.  These include items such as toiletries, food, oil, etc.

Usually these are stocks of very established businesses so investing in them wouldn't have the added risk of a new company or one still trying to find its way.  

Furthermore, these stocks are not just great for inflation but they are good in any economic season.  After all, even in a recession people are still going to need food, toiletries, and other everyday necessities.

Treasury Inflation-Protected Securities (TIPS)

Normally, you'll want to steer clear of most bonds during inflation as their values will continue to drop.  But there is one type of bond in particular that does offer protection against inflation.

And those are bonds that adjust their principal according to the inflation rate.  These bonds are sold by the US government and are called Treasury Inflation-Protected Securities, or TIPS.

TIPS give you one way to keep up with the inflationary rate and maybe even squeak out a little ahead.  Downside is, it won't be by much.

Also, if you are one for taking risks, you may want to consider another type of bond: junk bonds.  During times of inflation, people will run to these types of bond in the hopes of getting bigger returns.

Commodities

There are plenty of investors who swear by commodities during times of inflation.  It is an age old wisdom that if the market is down or inflation is running rampant, you should be investing in gold, silver, oil, and other commodities.

These commodities are seen as a good hedge against inflation because as the value of the dollar drops.  The price of these commodities tend to increase.

So you'll definitely want to have commodities as part of your portfolio.  And when you get a whiff of inflation on the horizon, it just might be time to load up on a bit more.

You can invest in commodities through ETFs and mutual funds or buy the real deal through trusted online sites.

Cryptocurrency

The newest and very popular asset class you could invest in during times of inflation is cryptocurrencies.  Even having a little bit of it in your portfolio can be a great hedge against a declining dollar.

The reason crypto is excellent against inflation is because it's not affected by the eroding value of fiat currency, or paper money.  When the stock market crashes, this is where people will turn to.

And as paper money becomes less and less valuable, it is to crypto that everyone will run.  When they do, the value of the crypto you hold will soar.  

But, crypto is still a very unpredictable and volatile market.  And many experts say it should not make up more than 5% of your portfolio.

Alternative Investments 

During times of inflation, a lot of investors will turn to more tangible assets such as artwork, jewelry, trading cards, vintage items, and other collectibles.

Oh, and did I mention wine?! Yup, fine wine makes the list!

These alternative investments while not as popular as say commodities or crypto, are good assets to have in times of inflation.  That's because they tend to rise in value during inflationary periods as people seek to put their wealth in something other than a crashing fiat currency.

So, you may want to consider putting these in your portfolio and don't be afraid to add more if you see the value of the dollar decreasing.

Real Estate

This is by far my most favorite kind of investment and it is an excellent asset to invest in during inflationary periods.  Better still if you get in just before inflation really takes off!

Having such a real, tangible asset such as real estate is not only comforting but very profitable when the tables turn and inflation sets in.

Real estate offers two great benefits during times of inflation, that will probably see you making the most money ever from a single asset.  That's because, land and property values increase as inflation increases.

Then if you own the property and use it for rental income, you can pass on the inflationary increase to your tenant since typically rent prices also rise with inflation.

A two for one bonus!  You get a property whose worth increases by leaps and bounds and more profit from your rental income!

However, it can take a lot of money to buy a property in the first place.  So, if that is too expensive for you, try investing in real estate investment trusts, or REITs.  

That way, you are able to reap some of those inflationary benefits with out having to fork out all the money required to buy the property yourself.

What NOT to Invest in During Times of Inflation

Since we are talking about how to invest during times of inflation, I figured we might as well cover how NOT to invest during these times as well.  After all, when it comes to your money, you don't want to make these simple mistakes and cause yourself to lose fortunes.

Mistake #1 - Investing in Long-Term CDs

Certificates of Deposits, or CDs, is one way to save your money and earn a little extra in interest than a regular savings account.  These CDs come with a fixed interest rate over the term of the CD.

Banks offer 6-month, 2-year, 5-year, and even 10-year CDs.  Some people opt to do longer terms because the longer the term, the higher the interest rate.

However, during times of inflation, it is best to avoid long-term CDs.  Why?  Because by locking yourself into these accounts, you might miss out on opportunities to earn even higher interest.

Furthermore, CDs have pretty strict rules.  You definitely don't want to withdraw any money from these early, as these accounts come with stiff penalties for early withdrawals.

Of course, during inflationary periods the interest rate for these accounts will increase as well.  But that's why you don't want to lock yourself into a 10-year CD with a 2% interest rate only to find out in a year that now that interest rate is up to 6%.

So, you can still put your money into CDs if you want.  But, during inflationary periods it would be better to only put them into short or intermediate term CDs.  This will give you the opportunity to take advantage of rising interest rates.

Mistake #2 - Investing in Long-Term Bonds

This mistake is quite similar to the first one.  Investing in long-term bonds during times of inflation is a no-no.  Simply because ,by doing so, you lose you chance to get more money from higher interests rates.

As with CDs, the interest rates of bonds increase with inflation but just the same you don't want to lock yourself into a lower rate when you could make more.

So, during inflationary periods, it is better to invest in short to mid-term bonds.

Mistake #3 - Investing in Growth Stocks

Another mistake that many investors make when investing during times of inflation is to invest in growth stocks.

Most of the value in these stocks stem from the company's future earnings.  But, as inflation increases, those earnings become worth less and less.  Consequently, the value of these stocks can plummet.

Of course, that doesn't mean they won't bounce back.  After all, the stock market always rises.  At least, so they say.  But during these inflationary times, you may want to avoid growth stocks.

All in All

When it comes to learning how to invest during times of inflation, you don't have to learn from your own experience.  Learn from the experts or simply learn from the past. 

What stocks rose during inflationary times?  What industries soared?  Once you figure that out, you'll be well on the way to protecting yourself from the whims of inflation.  

Of course, I hope some of this tips here have given you some good ideas of which assets you'd like to invest in.  

Besides, there are benefits for investing in assets other than stocks.  You get to diversify your portfolio while at the same time keeping your buying power.

It's a win-win!

But if this all seems like too much of a headache for you, experts recommend just maintaining a 60/40 portfolio ratio of stocks to bonds.  It is generally considered the safest.

Good Luck! And Happy Investing!