7 Tips for Investing During Inflation

Inflation can cause lots of panic among consumers. However, every good investor knows that there is always an opportunity to make money—even during times of rising inflation.

Here are a Few Tips for Investing During Inflation

1. Buy Cash Flow Real Estate
2. Invest in Recession Proof Stocks
3. Diversify Your Portfolio
4. Buy Treasury Inflation Protected Securities
5. Consider Gold and Precious Metals
6. Hedge with Cryptocurrency
7. Explore Options Trading

Inflation means a certain currency experiences a decline in its purchasing power. Think of old-timers talking about the things they used to be able to buy for a nickel—a cup of coffee in the 1950s or even a mug of beer in 1878. And while inflation is always on the rise, it’s usually at a slow and steady rate. These days, however, it’s rising at a more rapid rate, and consumers are finding that their dollars aren’t able to purchase as much as they used to.

History of Inflation

A long time ago, currency was a real asset: mainly, gold and silver. A few centuries ago, banks began to circulate paper notes, but these notes were still tied to the real asset of precious metals.

Printable paper currency arguably facilitates economic growth. But even so, it began the process of severing the financial markets from the tangible worth of gold or silver. Many economic theorists point to this severance, along with the advent of central banking, as the main culprit in the historically steady incline in consumer prices.

Some say the creation of America’s central bank, the Federal Reserve Bank, actually curbed cycles of aggressive inflation, while others suggest that its increasing severing of the dollar from the gold standard has created an endless inflationary environment. The exact causes of inflation are beyond the scope of this article. What we want to focus on is the practical aspect of what you can actually do when your money is losing its value.

How is Inflation Measured?

The Consumer Price Index is a metric that compares the current prices of consumer staples and necessary services to previous prices, examining what is literally referred to as a basket of goods. This proverbial basket might include things like milk, cereal, coffee, furniture, toys, transportation costs, and even tickets to a museum.

As you can see, a CPI is subject to a somewhat malleable formula that takes into account commodity items as well as discretionaries. For this reason, the CPI as a barometer for determining the inflation rate is controversial. But one area where rising inflation cannot be ignored is consumer wallets. If raw materials cost more money, businesses pass those higher costs onto consumers. Unexpected inflation can wreak havoc on families with a fixed income, and almost always results in a change in political and policy-making landscapes, especially when the inflation risk seems long term.

Should I Invest During Inflation?

Absolutely! You should always be allocating a portion of your income toward investments, and if you work at a company with a matching benefit, you should make sure it’s maxed. The official name for this consistent investment strategy is dollar cost averaging. Dollar cost averaging generally sees higher stock market returns in the long run, even when your dollars have less purchasing power than in the past. In fact, investing during inflation can actually be a great source of inflation protection because the losses you sustain from higher prices will be more than made up for by the growth of your invested dollars in the long term.

Even stock traders who profit off the swings in stock prices can still profitably invest during a recession. Returns may be lower because the volume of trading activity helps prices fluctuate, and if fewer people have disposable income to put into the stock market, the profitability of price swings may be reduced simply because they are not as great as they would be if more investors and traders were active. That said, investing in a growing asset class, despite inflation, is still a sound investment.

Here Are Tips for Investing During Inflation

If you’re looking to grow your money during times of rising inflation, consider one or more of these strategies:

1. Buy Cash Flow Real Estate

“Buy land…they’re not making it anymore,” Mark Twain sagely advised. Real estate is an excellent asset because once you own it, you can’t lose it, and it almost always improves in value over time. Not only that, but real estate is a particularly great investment during inflation if the properties you own are tied to a fixed-rate loan. As long as it doesn’t violate rent control policies in your state or county, you can always increase rent year after year while making the same monthly payment on your mortgage loans—which essentially means more cash flow for the same price.

And if you buy and flip houses, you can take advantage of hot markets driven upward by inflation with rising housing market prices. Emerging markets in the real estate scene are particularly attractive because they are more affordable than comparable assets in other areas, and inflation will quickly drive up the value of your property after purchasing it.

2. Invest in Recession Proof Stocks

It’s a well-known pattern that inflation can wreak havoc on the stock market. When consumers have less purchasing power, discretionary purchases, like subscription services, meals in restaurants, and vacations are the first expenses to be cut. That’s when these companies see profit drops, and subsequently, their stock prices fall.

But people will always need food, medicine, and consumer staples, like paper goods such as toilet paper. These recession proof stocks tend to weather the inflation storms, and sometimes even do better because the price of their products go up.

Energy stocks are another good buy, as are gas and oil stocks. If the price of oil is going up, you can bet that gas companies are making more money, which they will pass on to shareholders for a nice profit margin all around.

No matter whether you’re a beginner or a seasoned stock investor, there’s always room to grow! Join our weekly Stock Investing Room for more expert-approved stock market strategies designed to safely and rapidly grow your portfolio.  

3. Diversify Your Portfolio

Don’t put all your eggs into one basket, the old saying goes. If your stock portfolio is entirely invested in one industry or even just one company, it can take a serious hit when times are bad. That’s why you should invest in a variety of different stocks, so if inflation makes choppy waters in one industry, the other stocks you have can balance out the portfolio performance.

For most investors, a mutual fund is an even better option because it’s managed and guided by financial advisors who know how to create an inflation hedge through other asset classes, such as cash and bond yields. Which brings us to our next point…

4. Buy Treasury Inflation Protected Securities

These TIPS, as they are called, provide a great hedge against inflation losses because their value increases with inflation while decreasing with deflation. TIPS mature in 5-, 10-, and 30-year periods and pay interest twice a year. They are sold in multiples of $100, so you need at least a Benjamin to get started.

As you might know, the basic premise of treasury notes is that you are loaning money to the government, who pays you back with interest. Aside from TIPS, bonds are not often a great investment during inflation increases because rising inflation can actually reduce the interest payments of the bond.

5. Consider Gold and Precious Metals

Oftentimes, as the price of money goes down, the price of gold and silver goes up. Nobody is walking around using gold and silver pieces as currency, and paper money is no longer tied to precious metals, but they still have inherent value, just as they have for thousands of years.

You can buy and store precious metals yourself just by walking into a local dealer or by purchasing it from a company that will store the gold for you in a secure location. As inflation increases become excessive, it doesn’t hurt to have small denominations of gold and silver securely stored in your home. While such an occurrence is rare, there have been times in history where paper money had little to no value, but you could still buy food with gold and silver coinage.

6. Hedge with Cryptocurrency

Cryptocurrency is comparatively volatile when held up against other types of asset classes. But if you know what you are doing, you can make some serious money if you invest in cryptocurrency.

Because this digital coinage is not tied to any government or central bank, it’s not impacted by policies or events that can lead a fiat currency, like the dollar or pound, into an inflationary period— making it a great investment during times of uncertainty. However, we still have yet to see cryptocurrency leveraged for everyday financial exchanges, especially in-person ones.

7. Explore Options Trading

When it comes to trading options, an option contract gives you the right (but not the obligation) to buy or sell a stock at a certain price. If you think a certain stock or ETF is going to go down in price, you can buy a put option and make money off the increased value of the option contract itself, or by buying the security and then reselling it at the strike price specified in the options contract.

It’s a bit complicated and somewhat similar to short selling, but if you are able to do your research and figure it out, it can be a great way to pocket money when the market dips.

Keep Investing, Even If You Have to Reduce the Amount You’re Able to Invest

Some of the strategies outlined above will not be good for everyone, but chances are there’s at least one that is doable for you. If nothing else, you should continue to stay consistent with your investments because growing money over time is all about consistency.

Some retail investors feel that inflation prevents them from staying consistent because they are put in a financial pinch. Perhaps just a few months ago they were able to put a few hundred dollars away every month, but now they can only sock away less than $100. Or perhaps you were formerly able to put some money away every month, but now you really can’t even afford to put anything away.

Or so you think! Micro investing is a great strategy for these situations because you can literally just invest your rounded up change into a brokerage account through an app like Acorns. Apps like Robinhood also let you buy fractional shares of stock for as little as $1. Can’t afford to buy one share of IBM or Facebook or Disney? No problem. You can do a few dollars at a time by purchasing fractional shares.

Don’t let inflation stop you from investing! In some cases, inflation can even trigger events that yield opportunities for making more money, such as through options contracts, real estate, or Treasury Inflation Protected Securities.

Whatever you decide to do, pulling your money out of the bank and hiding it under your mattress is probably not the way to go. But where there’s a will, there’s a way—sign up for a free Infinity Investing membership to learn more about the wide variety of investing strategies available, no matter your financial situation. With just a little help from our investing tools and financial experts, you’ll soon be on the path to financial freedom; one dollar at a time.

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