Over the past few years, the purchasing power associated with the American dollar has declined. This decline in purchasing power generally results in price increases. These two events coupled together are referred to as inflation. During uncertain economic times, people have a tendency to stockpile money and will avoid making certain purchases.
While having a tighter budget is a good idea during inflationary times, you need to be open to certain investments. Putting your money in the right places during inflation can result in big capital gains in the future.
The inflation rate in the United States is the highest since 1981. Are you looking for places to put your money during these inflationary times? If so, here are some things you should consider.
Precious Metals Are a Good Investment
For years, financial-savvy consumers have looked for investments that provide a hedge against inflation. One of the best investments when trying to meet these criteria is precious metals. Precious metals like gold and silver are valued in American dollars. This provides this type of investment a real advantage when the value of the dollar falls.
When this decline in dollar value occurs, investors use other currencies to make buying gold and silver cheaper. Assessing silver and gold value before you make this investment is crucial. The more you know about the investment returns produced by precious metals, the easier it will be to decide if they are right for your portfolio.
Historically, silver has been the highest performing precious metal investment in inflationary times. Working with a precious metals investment professional is a great way to figure out whether gold or silver best fit your long-term investment goals.
Think About Investing in Value Stocks
It is difficult to predict how inflation will affect the stock market. For the most part, stocks are broken into two categories. Growth stocks generally originate in the consumer discretionary goods or technology sector. Value stocks are created when companies are trading well below their worth. These types of stocks will originate in the energy, industrial and financial sectors.
Having the foresight to buy value stocks while prices are low can help you create an inflation hedge. Ideally, you want to use the advice of Elon Musk and invest in companies that you feel make great products. By choosing value stocks with this mindset, you can see a good return on your money when the market starts to rebound and inflation starts to decline.
Add Floating-Rate Loans to Your Portfolio
Larger corporations have to seek out lines of credit in a different manner than the average consumer. When larger corporations need debt financing, they will seek out floating-rate loans. This type of loan is generally negotiated between a group of banks and a corporate entity. Corporations that use these types of loans are subject to variable interest rates.
As interest rates start to rise, a floating rate loan will usually hold its value much better than fixed-income bonds. However, there are some risks associated with using floating rate loans. For instance, the companies that seek out these types of loans have lower quality credit. This means the probability of these loans being defaulted on is much higher. In some cases, taking on this type of investment is worth the risk if it pays off.
Real Estate Investment Trusts
The companies that finance or own income-producing real estate in a number of different sectors are known as real estate investment trusts (REITs). Generally, REITs will develop and buy properties with the goal of using them as ongoing income. This is drastically different from the average real estate investment firm that will buy properties to then fix up and resell.
With the help of these investment trusts, investors are able to include various types of real estate in their portfolios without having to purchase them outright. For years, REITs have offered investors protection against inflation.
One of the first things that usually happens in inflationary times is a rise in property values. This means that people using REITs are able to see moderate investment increases during inflation. Before investing in a REIT, you need to familiarize yourself with the type of real estate in the portfolio. With some time and the help of an investment advisor, you should be able to find the right REIT to invest in.
The Power of Treasury-Inflation Protected Securities
A treasury inflation protected security (TIPS) is a bond designed to protect investors from the threat of inflation. The main idea behind these bonds is to preserve purchasing power. These bonds are issued by the U.S. Treasury and have a fixed interest attached to them. The interest payment on this security fluctuates based on the changes to the Consumer Price Index.
You need to realize that TIPS are not guaranteed investments. While these securities are indexed to inflation, there is no guarantee that they will rise in value during inflationary times. Generally, TIPS will respond less to actual movements of inflation and more to the expectations of investors. You also need to remember that any gains and interest earned from TIPS will be taxed by the federal government. However, these securities are exempt from both local and state taxes.
Real Estate is a Worthy Investment
Another great way to protect yourself from the rigors of inflation is by investing in real estate. When inflation occurs, property values tend to rise. As property values rise, rental property owners can justify rent increases. The key to having success with real estate investments is getting in while prices are low.
As you start to look at potential real estate investments, you have to consider both condition and location. Trying to buy properties that are located in bad areas can cost you money in the long run. This is why you need to insist on buying properties in desirable locations.
If you find a property you want to buy, be careful about the type of mortgage you choose to fund this purchase. Some newcomers to the world of real estate investing make the mistake of choosing an adjustable-rate mortgage. Ideally, you want to choose a fixed-rate mortgage to nail down the exact cost of your monthly payment. Having this information will help you better budget your money during inflation.
Once you have a new rental property in your possession, you have to keep it in pristine shape. If you don’t have time to manage your rental property, then hiring professionals to help you out is wise. Allowing a property management firm to help you out is crucial when trying to keep your investments appealing and functional.
The money paid to these firms is worth it due to the long-term benefits they can provide. Before hiring a property management firm, you need to find out more about their reputation and experience level.
It’s Time To Find the Right Investments
With all of the different investment opportunities on the market, choosing the best one can be difficult. Meeting with a financial advisor is a great way to choose the right investments to fit your needs. These professionals will also be able to provide help when it comes to managing the various investments in your portfolio.
Jason Butler is the owner of My Money Chronicles, a website where he discusses personal finance, side hustles, travel, and more. Jason is from Atlanta, Georgia. He graduated from Savannah State University with his BA in Marketing. Jason has been featured in Forbes, Discover, and Investopedia.