Need help figuring out where to park your money during an inflation surge? Here are some of the best inflation-proof investments to consider:
Gold
Gold tends to hold its value even during inflation. Why? Because the Fed can’t inject gold into the economy like they can with cash, which means gold’s value isn’t based on the central bank’s actions. Instead, gold’s value comes from its inherent scarcity and difficulty to mine.
Investing in gold can sometimes mean buying a physical block of gold and locking it away in your safe. But you can also invest in Gold exchange-traded funds (ETFs). According to a NASDAQ report, investors poured around $7.3 billion into SPDR Gold Shares (the largest gold-backed ETF by asset) in just three months to combat inflation.2
Real estate
Real estate is traditionally used as a reliable hedge against inflation since property and rental values tend to increase as the price of goods and services rises.
Also, because the demand for homes and apartment rentals tends to remain constant regardless of economic conditions, owning real estate could provide investors a steady source of income.
Purchasing a property typically requires a substantial upfront investment and is most likely not an option if you’re on a tight budget. Don’t worry though: You can still invest in the real estate market with real estate investment trusts (REITs). You can buy them through an online brokerage account by purchasing shares of publicly traded REIT stocks or mutual funds and ETFs that invest in REITs.
REITs operate portfolios of residential, commercial, and industrial properties and pay 90% of their taxable income to shareholders annually as dividends. And they tend to outperform the S&P 500 despite high inflation, according to the National Association of Real Estate Investment Trusts.3
Commodities
Besides precious metals, other commodities like agricultural goods and raw materials tend to perform well during inflation due to their inherent value.
In 2022, Invesco DB Commodity Index Tracking Fund (DBC) — the largest broad basket commodity ETF by assets — rose nearly 18%, while the S&P 500 declined by approximately 20%.4 So, if your investment portfolio doesn’t yet include any commodities, consider adding some to diversify your investments.
Though commodities are typically considered inflation hedges, some prices are more volatile than others. For example, global oil prices inflated to over $110 a barrel due to supply concerns because of the conflict between Ukraine and Russia. If you’re interested in investing in commodities, consider more stable ones like gold or base metals instead.
Treasury securities
One of the most popular treasuries to invest in during inflation is treasury inflation-protected securities (TIPS). As the name suggests, they’re bonds issued by the U.S. government that offers protection against inflation. TIPS’s principal (face value) adjusts according to inflation levels. When it matures, you get either the adjusted or the original principal — whichever is greater.
You can purchase TIPS by opening an account through the U.S. Treasury at its TreasuryDirect site. You could also invest in them by buying ETFs or mutual funds that hold TIPS.
Another inflation-proof asset class worth looking into is Series I savings bonds (I bonds). With these bonds, you earn a fixed interest rate and a variable rate that changes with inflation and adjusts twice a year (in May and November). Like TIPS, you could purchase I bonds through the TreasuryDirect site.
Floating-rate bonds
Floating-rate bonds (FRBs) have an interest rate that is adjusted based on a predetermined formula.5 In other words, if inflation increases, the interest rate on your FRBs also increases.
Because the interest rates on floating-rate bonds adjust according to the market conditions, FRBs can help you avoid market price volatility during inflation since there’s less opportunity cost. In layperson’s terms: Your FRBs’ returns will keep pace with the rising costs of goods and services, unlike traditional fixed-rate bonds.
