High levels of inflation are not only eating into your pocket and day-to-day cost of living, it also makes it difficult to know where to be investing with your long-term savings.
To give you some investing inspiration, we’re going to take a look at a few different ideas for putting your money to work when prices are rising faster than a toupee in a hurricane.
Keep on reading for a complete dive into the finer details, or a click on a link to go straight to a section…
- Why does inflation impact investing?
- What does it mean to hedge against inflation?
- 5 ways to invest during high inflation
- Worst performing investments for inflation
- What else should investors know?
Inflation changes the economic outlook for businesses in a few different ways. Just like inflation impacts your spending power right now and in the future – it also alters a company’s immediate financials and future projections.
Here are a few examples of ways that inflation impacts some investments:
- Higher inflation means the future returns are worth less in real terms.
- Some companies struggle to pass on rising costs to consumers, so their profits shrink.
- The cost of borrowing in a time of rising interest rates makes it more expensive for firms to borrow.
- An increase in rates also means that analysts recalculate what they think a stock is worth.
- Investors look for safe returns that pay today instead of tomorrow.
This is when you use different sorts of investments in an attempt to protect the whole value of your portfolio from the effects of inflation.
Some assets and investments have traditionally worked in useful ways to at least dampen the impact.
This can involve a mixture of inflation-proof investments and ones that are not heavily affected by rising prices. Also, high performers that can outpace the inflation rate.
It’s never an exact science, because each situation is different. There are plenty of factors that can play into the performance of different companies:
- What’s causing the inflation in the first place?
- What is the current level of interest rates?
- How healthy is the rest of the economy?
- Is there low or high unemployment?
- Are GDP figures looking buoyant or a bit flat?
All these important questions can play into the big-picture inflation scenario. So, most experts will stay divided on the ideal way for you to respond with your portfolio.
There’s no guarantee that these methods will work going forward, but here are some ways of investing that have fared well in the past for investors:
Choosing to invest in commodities is an excellent way to give you some added diversification outside of normal markets. In times of high inflation, commodities (things you can touch, feel and use) have traditionally done well.
Adding different types of commodities into your investment portfolio has proven to be an excellent tool in the past.
So, it ends up costing you more cash to buy the same amount of certain commodities, allowing their price to ride the wave of inflation.
These days you can even use ETFs (exchange-traded funds) or mining companies to give you some broad exposure to commodities like gold and silver.
Similarly with other commodities such as nickel, wheat, iron or steel, you can invest through ETFs, mining companies or other companies that process the commodities.
2. Shares with Pricing power
If you find companies with pricing power – in other words, they’re able to pass on higher costs – those companies are likely to do well in a time of inflation. It’s not great for consumers, but it’s very appealing for investors.
When you buy stocks and shares in this category, they’re able to keep putting up their prices which allows them to keep the same level of profit.
A few examples of the types of firms that fall into this category include:
- Apple (AAPL)
- British American Tobacco (BATS)
- BHP Group (BHP)
- Mastercard (MA)
You can also use index tracking funds instead of picking shares. A broad index will include some investments poorly suited to high inflation. But, it will also likely contain some great picks.
But, the index you choose also matters. When inflation and interest rates are both cruising north, you’d expect the FTSE 100 to be a safer bet than the NASDAQ 100.
3. Value stocks
When inflation is running hotter than hell, value investing becomes more attractive.
Value investing involves finding shares that are trading at cheap prices compared to their current earnings – hence ‘value’.
The reason these forlorn shares sometimes turn into hot stocks is that money earned today is worth more than money earned later.
This is because inflation erodes the value of money in real terms, buying you less with the same amount.
Real estate has held up very well when inflation has been high in the past. That doesn’t mean that it will automatically do well now but it’s a decent bet.
But, don’t fret if you can’t afford to buy a whole buy-to-let property.
Happily there are ways to invest without becoming a landlord.
REITs often own a portfolio of buildings, usually commercial rather than residential buildings such as:
- Data centres
Not the most riveting constructions, but ones that can make money.
Also, REITs work in a way that they are required to pay at least 90% of profit as dividends. This can lead to a very tidy return and some stable income when inflation is knocking at your door.
5. Alternative assets
Alternative investments are something we’ve talked about recently and include areas like art.
It can be a bit of a tricky field to find your way around, but there can be some great returns available by thinking outside the box.
Popular options to research further include:
- Classic cars
- Collector’s items and memorabilia
Some of these are very long-term plays. But, you could put your money into something cool and interesting that will also appreciate over time (hopefully).
It’s worth touching on some of the investments that tend to be thought of as stinkers when inflation is high:
- Technology stocks
- Firms that promise future growth but don’t make any money today
- Riskier assets
- Companies that don’t create essential items or services
- Some cyclical shares
This isn’t to say you should avoid these types of investments. Often, it’s a great time to pick up bargains as the prices can be more depleted than a worn-out whoopee cushion.
However, it could take a long time for the price to rebound. So make sure you have a long-term time horizon if you go down this route.
It’s important to understand your decisions are probably not going to be perfect. Unless you’re extremely lucky.
But, if you diversify and spread your bets, you can reduce your risk. And, give yourself better odds of picking winners when investing during periods of inflation.
If you’d like to keep up with all the latest inflation news and market movements, make sure you sign up for the fortnightly MoneyMagpie Investing Newsletter.
This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.