Where to Invest During Inflation


Aug 2, 2020
  • #1
There are tons of asset classes out there, but only a few are appropriate for investing in when inflation is occurring or is right around the corner. It's best to educate yourself on what's smart and not smart investing at times like this. In this post, I'll attempt to shed some light on how you can handle your money during inflationary periods. Just remember, I'm no expert. If you would like expert advice on which to rely, you'll need to seek out a professional advisor. I'm just basing what I write off of my own personal experience and research.

Before I begin, let's talk about what inflation actually is. Inflation, in no uncertain terms, is the measure of the spending power of a particular currency. As I'm sure you've seen, it's measured in percentages. So if you hear something like, "Boy, inflation has really gone up this year. It's past 10%!," that would mean that the value of the dollar has dropped by 10% over the previous year. There are a number of reasons this may happen, but it's primarily caused by the introduction of additional currency into the economy via debt. When banks are making loans at an increasing rate, inflation in some or all parts of the economy are sure to follow. We all remember the housing bubble of the eary 2000s. I actually purchased two houses during that time and the banks were practically throwing money at me. Sure enough, as those banks made loans, the price of housing skyrocketed, which resulted in a reduced purchasing power for me. It seemed like as the weeks passed, my dollar could purchase less than the week before.

This brings me to a very good point. Think about it. If you're able to buy a certain sized house for $100,000 one day and then three months later, a similar sized house (all other things being equal) costs $110,000, you just experienced inflation. Another way to say this is that your purchasing power declined during those three months. Instead of getting all of your $100,000 worth of house after three months, you're only getting $90,000. Now, ask yourself, wouldn't it have been wise to purchase the house as soon as possible? The answer is yes. During an inflationary period, it's prudent to make purchases quickly. And you really want to buy more than you need, so you get things cheaper. For instance, if you knew car prices were going to rise by 20% in the next year and you needed a car, it would be foolish to wait to buy. Buy now and buy fast. Before those prices go up.

Anyway, I'm going to list a few asset classes that I think would make wise investments during times of inflation. Some are better than others and some may take a while to kick in, but all should be very good. Some asset classes, like real estate and stocks actually have the potential to make you money (dividends) while inflation is going on, while other asset classes like commodities and gold are primarily used as hedges against that inflation. This means that they won't make you any money (income), but their value will grow.

Real Estate - I love real estate, but only via ETF. I personally like Vanguard's VNQ, but that's just because I've owned it for a very long time and it's been good to me. It's also inexpensive to own. At the time of this writing, I believe this REIT is offering a 4.5% dividend, which is quite nice. The reason real estate is good to own during an inflationary period is because as prices rise in general around the economy, so does the value of homes, office buildings, and other areas of the market. Along with that, rents go up, increasing payouts to shareholders.

Commodities - Gold isn't going to earn you an income, but it's a great hedge against inflation. As the value of a currency drops, the price of gold seemingly rises. The reason I say seemingly is because it's not (usually) really moving at all. Gold is (usually - in a normal market) always steady. Currencies just move around it. Gold prices move for two reasons - first, because of inflation and second, because of investor sentiment. If investors think inflation is around the corner, they'll scoop that gold right up, driving up prices. In general though, commodities such as oil, cotton, soybeans, and orange juice are good hedges against inflation. These products are directly tied to the economy, so when consumer prices go up, so does the cost of these source products. Or, is that the other way around? These prices climb first, resulting in higher consumer prices. If you own a commodities ETF, you may see its price rise during heavy inflation.

TIPS - Treasury Inflation Protected Securities is a great way to combat inflation. While bonds generally aren't a great choice to counter inflation, these bonds do well. They're tied to the Consumer Price Index. When inflation and interest rates rise, so does the base value and interest rate of these bonds. I personally like the TIP ETF by iShares.

Stocks - In general, stock prices will eventually rise with the rise in inflation. It may take a little while, but they'll get there. Just be sure to pick the right stocks. Ones with high dividends usually don't do well. Consumer staple stocks do because they can pass along higher prices to the consumer. My advice is to purchase an ETF like Vanguard's VOO as part of your portfolio. Then, you can rebalance as time goes on and pretty much set it and forget it. That's what I do.

Do you have any suggestions for how to invest during inflationary periods? If so, I'd love to hear what you have to say. I'm always up for learning more.


Aug 3, 2020
  • #2
This post is very opportune. I think it's the best kept open secret that the Fed will spur inflation in the very near future. Or, at least the near future. It has already dumped trillions of dollars into the economy and markets and will continue to do so, in my opinion. While the bankruptcies that are occurring all around us because of the pandemic will try to drag the economy into a deflationary spiral, the Fed's purchases of everything from bonds to securities will be sure to keep the economy, at least for now, on a slightly inflationary path. We're basically in a money destruction/money creation war.

I just read an article on CNBC that said Fed Chairman Jerome Powell will tell us something big on Thursday, August 27 while on a virtual call to Jackson Hole, Wyoming. He's forecast to say that the Fed will enact the most active measures ever to spur inflation to healthy levels. Now, inflation is a tough subject to discuss because some hate it while others claim it to be a necessary evil. Those who are in debt love it. Actually, the best thing to do before an inflationary boom is to go heavy into debt. Just be sure you've got a nice low fixed rate. You can pick up some sweet deals at low rates. Then, as inflation kicks in, you're left paying back a relatively inexpensive loan at a much lower interest rate than the market is currently offering. Although, this time I don't expect interest rates to pick up very much because the Fed will be changing how it gauges the measure of inflation. They'll now be using an "average inflation" model that may take longer periods of time into account, rather then the shorter periods more traditionally used.

I have a feeling that we're going to see some very strange things happening soon. It would behoove investors to take this seriously. Remember, the Fed can never run out of money. They can print it forever, so you better think about investments that can play nicely with that reality. I think what people are most concerned about is the coronavirus being tightly controlled through cure, vaccine, or therapy at the same time as the Fed is creating a lot of money. If that happens suddenly, prices can skyrocket quickly. This may be the crisis we've all be waiting for.
Where to Invest During Inflation was posted on 08-26-2020 by CraigHardy in the Finance Forum forum.
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