Much ink has been spilled about inflation’s impact on your budget. However, inflation also affects investors. If you’re wondering what to invest in during inflation, this article will offer tips and strategies for inflation investing and the best investments during inflation. Manage your portfolio during a period of high inflation and learn about the best options for turning a profit in this turbulent economic period. Of course, investing always carries some risk. There are no guarantees, but you can aim to outpace the inflation rate over the long term. Have questions or want help with your investments? Contact our Wealth Management team.
Tips for Managing Investments During Inflation
Take stock of your current investment strategy and portfolio. If you feel a change is needed, consider implementing one or more of these tips.
- Diversify your portfolio.
If you’re wondering, “how to manage my investment portfolio,” the answer is diversification. Diversifying your portfolio means investing in different asset classes to spread out your risk. This strategy can be especially helpful with reducing risk during inflationary periods. Investing in mutual funds is an easy way to diversify because they group different securities including stocks, bonds, cash and other assets.
- Open a Certificate of Deposit (CDs)
When interest rates for borrowing are high, interest rates for savings products—including certificates of deposit—often rise. CDs are safe investment options—they are not only insured by the FDIC (up to $250,000), but their interest rates are locked in at the time of opening, meaning that the payoff on your investment is guaranteed, as long as you don’t withdraw funds before it reaches maturity. These features can be especially valuable when financial markets are experiencing times of turbulence and low returns.
- Focus on growth stocks and funds.
Investing in high-dividend stocks or growth and income funds can be beneficial for a period of time when prices are stable. However, this strategy can backfire if inflation prices start to increase rapidly. Consider investing in growth stocks and funds in sectors that usually benefit from inflation like energy, food, healthcare, building materials, and tech to boost your earnings.
- Invest smartly in your employer-sponsored 401(k).
If your employer offers a 401(k) retirement plan, make sure you are contributing at least enough to earn your employer’s full matching contribution. This increases your rate of return and helps you grow a nest egg faster. 401(k)s are also an easy way to diversify your investments with mutual funds and growth stocks.
- Don’t keep extra cash on hand.
You always want to keep enough liquid cash in your savings account or high interest money market as needed for your emergency savings, but any excess is best invested.
- Use the dollar cost averaging investment strategy.
Set it and forget it–investing is a long game, so your best bet is to set up a recurring (monthly, bi-weekly, etc.) contribution to your investment account. This is known as dollar cost averaging, and it means that your share purchases will even out over time between when prices are low versus high.
Investment Types to Consider
Some types of assets perform better in inflationary environments than others. You may want to add one or more of these to your existing portfolio.
- TIPS (Treasury Inflation-Protected Securities)
These government bonds are indexed to inflation through the Consumer Price Index. When inflation increases, the TIPS interest rate goes up, too. If inflation decreases (known as deflation), the TIPS interest rate falls as well. So, you are protected against spikes in inflation like we have been experiencing lately.
TIPS are backed by the federal government, so this is one of the safest investments. TIPS can also help you diversify your investments by balancing out your fixed income or bond portfolio.
Interest on your TIPS bonds is paid out twice a year at a fixed rate. These bonds are issued in 5, 10, or 30-year maturities. At maturity, you will receive the greater of the adjusted principal or original principal.
- REITs (Real Estate Investment Trusts)
REITs are companies that own and operate income producing real estate like apartment buildings, retail spaces, and other commercial property. Property values and rental costs usually increase with inflation, so this is usually a profit-producing sector of investments.
If you are homeowner, you are already invested in real estate. Beyond purchasing additional rental properties, which requires some hands-on work and maintenance, you can invest in real estate through REITS or mutual funds that invest in REITs.
When inflation is up it may be a good idea to move more of your investments over to commodities such as raw materials, metal, agricultural products, soybeans, and oil. The prices of commodities tend to increase with inflation, but this can be a risky investment because commodity prices fluctuate with supply and demand. Think of commodities as high risk with the potential for high reward.
- High-Yield Savings or Money Market Account
While it’s best to invest your excess cash, get the most out of the funds you need to keep for emergency and short-term savings. A Money Market is best for getting the highest possible interest rate on your cash savings.
- Short-Term Bonds
This type of asset is similar to a CD or savings account–your money will be safe and accessible. Short-term bonds are more resilient in the face of rising inflation and rising interest rates than longer-term bonds. You can reinvest short-term bonds at higher rates as they mature.
Our Wealth Management Advisors are here to help!
Managing your investments during inflation can be challenging. It’s also a good time to review your current portfolio and its performance to make sure it’s aligned with your goals and level of risk tolerance. Whatever you do, remember that investing is a long-term strategy for accumulating wealth and saving for retirement. If you don’t want to do it alone, we can help. Partner with Moody Bank in Austin, Galveston, and Houston today to help manage your wealth and assets for the future. Contact our Texas financial advisors to learn more!
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