Learn how to diversify your portfolio with stocks, bonds, real estate, commodities, and inflation hedges to beat inflation and manage risk effectively.
The purchasing power of money decreases over time due to inflation, which is an unavoidable economic phenomenon. Currency depreciation due to rising prices of goods and services lowers people’s standard of living and may lower investment returns in real terms.
If you want to keep more of your money and see it grow over time, you need to invest in things that can potentially outpace inflation. Here are ten investment strategies that can help you beat inflation and build wealth over time.
- #1. Stocks
- #2. Real Estate
- #3. Treasury Inflation-Protected Securities (TIPS)
- #4. Commodities (Gold & Silver)
- #5. Dividend-Paying Stocks
- #6. Inflation-Indexed Annuities
- #7. High-Yield Bonds
- #8. Infrastructure Investments
- #9. Equity Real Estate Investment Trusts (REITs)
- #10. Diversified Portfolio
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Those looking to hedge their money against inflation and maybe even outpace it should consider putting their money into well-established, fundamentally sound companies. Long-term investors looking for growth and wealth preservation should consider the stock market because of its history of outperforming inflation.
Investing in stable businesses can pay off in the long run because they can adjust to and even thrive in different economic climates. These businesses can weather economic storms thanks to their resilient business models, competitive advantages, and seasoned management teams. This allows them to maintain their profit margins and create value for their shareholders even as costs rise.
Furthermore, despite short-term fluctuations and market corrections, the stock market has historically demonstrated a consistent upward trend over extended periods. In an environment where cash and fixed-income investments lose value due to inflation, this innate growth potential becomes even more important.
Investors can take advantage of the compounding effect, where reinvested dividends and capital gains can result in significant wealth accumulation over time, by investing in the stock market.
Investors who hope to outperform inflation will also benefit from dividends. Companies with a long history of success often pay dividends to their shareholders.
Over time, these dividend payments may grow, sometimes at a rate that matches or even outpaces inflation. Therefore, investors receive a reliable source of income that protects their purchasing power, especially during times of rising prices.
However, investors should be aware that the stock market is volatile and that individual companies can experience setbacks. Diversification is crucial for mitigating these dangers. Investors can lessen their reliance on the success of a single stock by diversifying their holdings across a wide range of businesses and industries.
Investors in the stock market need to have a long-term perspective and the patience to ride out the inevitable ups and downs of the market without letting them derail their carefully planned investment strategy.
The stock market’s historical ability to provide capital appreciation, dividend income, and the benefits of long-term compounding makes it possible to outpace inflation by investing in well-established and fundamentally strong companies.
Take a methodical and diversified approach to the stock market, tailoring your holdings to your risk appetite and the scope of your financial goals. By doing so, you can use the stock market to protect yourself from inflation while also accumulating long-term wealth.
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#2. Real Estate
Historically, real estate investments have been trusted as a safe way to protect wealth from inflation. The unique qualities of real estate assets, such as rental income and property value appreciation, provide several benefits in the face of rising prices.
The rental income that real estate can produce is a major factor in why it is a good inflation hedge. Rental prices typically go up in tandem with inflationary pressures on the cost of living. Investors in real estate can then adjust their rental income in a manner that protects their real purchasing power.
Real estate income has the potential to grow over time, aligning with inflation and providing investors with a stable income stream, in contrast to fixed-income investments like bonds, where the income remains fixed.
In addition, over time, the value of real estate tends to rise. Even if there are temporary dips, the long-term trend in economically healthy and strategically placed areas is up.
Real estate, in particular, has a history of maintaining or even appreciating while fiat currencies lose purchasing power due to inflation. This growth in value does double duty by protecting the initial investment and laying the groundwork for future profit from the sale of the property.
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The inherent value and limited supply of real estate also make it resistant to inflation. Real estate in desirable areas is in high demand due to population growth and continued urbanization, pushing up prices. This gap between supply and demand acts as a buffer against inflation’s eroding effects.
Real estate investment, like any other type of investment, is not without its risks. But when you diversify your portfolio to include real estate, you’re better able to weather economic storms and protect your purchasing power against inflation.
Due to the prospect of increasing rental income and property value appreciation, real estate investments make a compelling case as a hedge against inflation. A tangible asset that maintains its value despite rising prices can be obtained by investors who choose locations with stable demand and growth potential.
Pro Tip: The success of a real estate investment is highly dependent on market conditions, location, and property management. Spreading your investments across multiple properties and locations can reduce your exposure to risk and increase your profit potential.
#3. Treasury Inflation-Protected Securities (TIPS)
Those who wish to protect their wealth from inflation should consider purchasing Treasury Inflation-Protected Securities (TIPS). These government-issued bonds are designed to track the Consumer Price Index (CPI), a common measure of inflation, and make adjustments to their face value accordingly.
As the CPI rises due to inflation, the principal value of TIPS rises as well, protecting investors’ purchasing power. TIPS offers a double-layered defense against inflation.
First, the inflation-adjusted face value of the bond is guaranteed to the bondholder thanks to the periodic adjustment of the principal value. This ensures that the investment will keep its real value over time, regardless of the rate of inflation.
Second, like inflation, the interest rates on TIPS increase over time. Interest payments rise in tandem with inflation because a constant rate is applied to the adjusted principal. This guarantees that the purchasing power of interest income is preserved while also providing investors with a higher yield than standard fixed-rate bonds.
TIPS are a safe and stable investment choice for those who would rather avoid taking any chances. Treasury Inflation-Protected Securities (TIPS) are guaranteed by the U.S. government and carry no market or credit risk.
Investors can rest easy knowing their money is safe in these bonds because of how low-risk they are compared to other assets. In addition, investors who are looking for tax-efficient ways to combat inflation will appreciate that TIPS are exempt from state and local income taxes.
Because TIPS come in a range of maturities, investors can select a time frame that best suits their financial objectives and comfort level with risk. They provide a safe and government-backed way for risk-averse investors to avoid losing money to inflation and maintain their standard of living.
Treasury Inflation-Protected Securities (TIPS) are, in sum, a reliable and secure investment option designed specifically to protect against inflation. They offer stability and a known level of protection against inflation, but they may not provide the same level of returns as riskier assets like equities.
Investors’ purchasing power is protected over time thanks to their innovative design, which adjusts principal value and interest payments following changes in the CPI.
Pro Tip: TIPS are an excellent addition to a diversified portfolio, especially when combined with other assets that may have a higher return potential but also carry a higher level of risk.
#4. Commodities (Gold & Silver)
Commodity investments offer an attractive means of protecting wealth and coping with inflation. Gold, silver, oil, and agricultural goods all have their own intrinsic worth and are used by many different types of businesses and people. These commodities are a powerful inflation hedge because demand for them increases as inflation takes hold, driving up their prices.
Gold and silver, both of which are considered “precious metals,” have been used as money for centuries. Investors seek the safety of these metals, driving up their prices, during times of economic uncertainty and inflationary pressures.
In particular, gold has a reputation for being a “crisis commodity,” or an investment that is a safe haven in times of economic or political uncertainty. This makes it a desirable asset for those who wish to hedge their bets against the swings in the value of more conventional investments.
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Oil is also an essential global commodity because of its central role in the transportation, manufacturing, and energy sectors.
The price of oil and petroleum products tends to rise because of rising demand as a result of rising living costs. Since oil’s value is directly affected by shifts in the demand and supply of energy, investing in it can be a useful hedge against inflation.
Grain and livestock are two examples of agricultural products that see increased demand in times of inflation. Agricultural commodities are in high demand because of rising populations and shifting eating habits.
Unfavorable weather and supply chain disruptions can also lead to temporary shortages and price increases. Since the rising cost of food and other necessities also drives up the value of agricultural commodities, investing in them can be a hedge against inflation.
Direct ownership, commodity futures contracts, and exchange-traded funds (ETFs) that follow commodity price movements are all viable options for those looking to invest in commodities. Investors need to weigh their investment goals and risk tolerance against the complexity and risks of each method before making a final decision.
One of the best ways to protect one’s wealth and maintain purchasing power during times of inflation is to include commodities as part of a well-diversified investment portfolio.
Gold, silver, oil, and food products are all examples of commodities that offer a promising hedge against inflation. These commodities are a good way to protect your purchasing power from inflation because their prices tend to rise in tandem with the rising cost of living.
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#5. Dividend-Paying Stocks
Companies with a track record of dividend payments provide shareholders with a stable and potentially increasing source of income, making them an attractive investment during periods of high inflation.
Shareholders receive dividend payments from their company regularly. Dividends give investors a real return on their money and, because they tend to stay the same, they can help cushion the blow of inflation.
There are several reasons why dividend stocks may be able to generate returns in excess of inflation. To begin, dividend-paying companies tend to be long-standing, financially sound, and profitable.
These features allow them to weather economic storms and continue paying dividends regardless of the state of the economy. Therefore, investors have a reliable source of income that grows over time, giving them peace of mind despite the economy’s volatility.
It’s also worth noting that businesses frequently evaluate and revise their dividend policies. Companies may decide to raise dividends in response to inflationary pressures so that their stock prices remain attractive to investors despite the impact of rising costs.
This means that the purchasing power of the investor’s income is protected against inflation thanks to dividend-paying stocks. In addition, dividend stocks provide a distinctive blend of income and growth potential.
The stock price of a company can rise if the company decides to increase dividend payments or reinvest its growing profits. Investors can expect a substantial total return from this combination of capital appreciation and rising dividend income.
Dividend-paying stocks are a common choice for those looking to preserve capital in a diversified manner. These stocks offer investors a steady stream of income, the possibility of growth in their investment, and the stability that comes from exposure to well-established businesses.
To sum up, dividend-paying stocks provide shareholders with a reliable source of income that has the potential to grow at a rate faster than inflation. Investors can count on a stable source of income that keeps pace with inflation as companies adjust dividends to reflect their profitability and inflationary pressures.
Dividend stocks provide investors with financial security and growth opportunities, and their combination of dividend income and the possibility of capital appreciation makes them an attractive addition to a diversified investment portfolio.
Pro Tip: When choosing dividend-paying stocks, it is crucial to think about things like the company’s financial health, dividend history, and sector performance.
#6. Inflation-Indexed Annuities
Retirement income can be protected from the eroding effects of inflation with the help of inflation-indexed annuities, also known as cost-of-living-adjustment (COLA) annuities.
The impact of rising prices during retirement can be especially worrisome, as retirees rely on their savings and investments to maintain their standard of living. An inflation-adjusted annuity can help with this problem by guaranteeing a steady stream of money regardless of how much the cost of living goes up or down.
Inflation-adjusted annuities are designed to increase regular payments in line with inflation, as opposed to traditional fixed annuities, which offer a predetermined, fixed income.
This means that the retiree’s annuity payments will increase in line with the general increase in prices over time. Therefore, retirees can meet their financial obligations and keep up their standard of living despite rising costs due to inflation without having to reduce their annuity income.
Longer retirements, during which inflation can compound and erode the value of fixed payments, highlight the importance of inflation-adjusted annuities. An annuity that accounts for inflation can help retirees feel more secure about their financial future and give them more peace of mind by reducing the likelihood that their income will fall behind the rising cost of living.
Additionally, annuities that account for inflation provide a reliable and consistent source of income. Because annuity payments are guaranteed to keep pace with inflation, retirees can confidently plan for their financial futures. During times of economic uncertainty, when market fluctuations and interest rate changes may affect other investments, this predictability can be especially valuable.
Inflation-adjusted annuities can be a great way to hedge against inflation, but they do not come without potential drawbacks, such as lower initial payout rates compared to fixed annuities. If you’re concerned about the eroding effects of inflation on your retirement income you can consider purchasing an inflation-adjusted annuity.
These annuities help retirees maintain their purchasing power by providing a steady stream of income that rises in tandem with inflation. Inflation-protected annuities are a great way to improve retirement financial security when used in conjunction with other retirement income sources and a diversified investment strategy.
Pro Tip: Retirees need to compare the terms and conditions of different annuity products, as annuities may have fees and surrender charges
#7. High-Yield Bonds
Bonds are a common option for those looking for both reliable income and security for their money. However, due to their fixed interest rates, they are frequently impacted negatively by inflation, which erodes real returns for investors because it reduces the purchasing power of interest payments from conventional bonds.
Those who are retired and living off a fixed income, or those who are risk-averse and want to safeguard their wealth, may find this particularly worrisome. High-yield bonds, also known as junk bonds, could be an option for investors concerned about the negative impact inflation will have on their bond portfolios.
High-yield bonds are riskier than investment-grade bonds because they are issued by companies with lower credit ratings. Higher interest payments or yields are offered on these bonds to compensate investors for the greater risk.
Because their higher yields have the potential to outpace inflation, high-yield bonds may be beneficial in an inflationary environment. Investors can protect their purchasing power by using the additional income provided by these bonds even though their fixed interest rates are still vulnerable to inflation.
High-yield bonds, with their higher yields, may provide a better opportunity to protect purchasing power as inflation eats away at the value of fixed interest payments on conventional bonds.
However, extreme caution should be exercised when dealing with high-yield bonds. These bonds carry a higher credit risk, and their higher yields reflect that. In times of economic downturn, companies that issue high-yield bonds are especially susceptible to financial difficulties and default risk.
High-yield bonds can be a profitable addition to a diversified portfolio, but even so, caution is warranted. Diversifying a portfolio by including high-yield bonds along with stocks and investment-grade bonds can reduce exposure to individual asset classes and boost returns.
Finally, high-yield bonds can provide higher interest payments that may help counteract the impact of rising prices, while traditional bonds may have difficulty in an inflationary environment.
Investors can protect their purchasing power and reduce the impact of inflation on their fixed-income portfolios thanks to the increased yields. However, investors should be wary and do their research because high-yield bonds have greater credit risks and may necessitate a more well-rounded approach in a diversified portfolio.
Pro Tip: Before investing in high-yield bonds, carefully evaluate the credit quality of the issuing companies and perform extensive due diligence.
#8. Infrastructure Investments
Toll roads, bridges, and renewable energy projects are all examples of infrastructure investments, a unique asset class that provides its own set of benefits, especially in an inflationary environment. These investments frequently include automatic price increases tied to inflation.
Transportation systems, power grids, and communications networks are all dependent on infrastructure assets, which are crucial to a country’s economic growth and development. Infrastructure investments are dependable sources of income regardless of the state of the economy because demand for these services is typically stable and resilient.
The ability of infrastructure investments to generate income is a major perk in terms of their effectiveness as a hedge against inflation. Contractual agreements with governments or public authorities often allow periodic fee adjustments for infrastructure projects like toll roads and bridges to account for inflation.
Infrastructure assets can keep their cash flows in real terms thanks to these built-in price escalation clauses, giving investors a steady income stream that grows with rising prices.
Inflation adjustments are also built into long-term power purchase agreements (PPAs) in certain infrastructure sectors, such as renewable energy projects. Revenue from these projects rises in tandem with inflation, shielding investors from the eroding effects of inflation on investment returns.
In addition, the asset lifespans of infrastructure investments are frequently several decades. Infrastructure assets can last for a long time and continue to function reliably, so their long-term nature is in line to reduce inflation risk. As a result, long-term investments typically provide steadier returns to their backers.
Investments in infrastructure can provide portfolio diversification benefits in addition to protecting against inflation. The performance of infrastructure assets may not be significantly impacted by fluctuations in the broader financial markets because of their low correlation with traditional equity and fixed-income investments.
The revenue-adjusting mechanisms and cash-flow stability of infrastructure investments make them an attractive option as an inflation hedge. These investments can help the economy grow and provide steady returns that keep up with inflation. When included in a diversified portfolio, investments in infrastructure can help investors weather the effects of inflation while still realizing their goals of long-term growth and income.
Pro Tip: Examine the infrastructure projects and companies thoroughly from a financial and performance standpoint as infrastructure investments come with their own unique set of risks that must be taken into account before you make any decisions.
#9. Equity Real Estate Investment Trusts (REITs)
Companies that own, manage, or provide financing for real estate that generates income are known as Real Estate Investment Trusts (REITs). Equity real estate investment trusts (REITs) provide investors with exposure to real estate appreciation and rental income, both of which have a positive correlation with inflation.
They provide a novel and simple way for investors to take part in the real estate market without having to acquire actual properties. These businesses have a vested interest in real estate assets that generate income, such as office buildings, shopping centers, apartment complexes, and manufacturing plants.
Equity real estate investment trusts (REITs) can be a good way to diversify your portfolio, especially if you’re concerned about inflation. The possibility of real estate appreciation is a major draw for investors in equity REITs.
In general, real estate values rise in tandem with inflationary increases in the cost of living. As a result, investors in REITs stand to gain from any appreciation in the value of the properties they own. The portfolios of some REITs are further bolstered by their involvement in property development and redevelopment.
Rental income from equity REITs’ properties also provides investors with a steady source of income. Inflation generally increases rental income, so REITs can raise lease rates to match rising costs. Equity REIT investors can enjoy a reliable source of income that will not depreciate over time.
Another perk for investors is the diversification provided by equity REITs. Many REITs have holdings in a variety of industries and locations. By investing in multiple properties, risk is spread out and the performance of any one property has less of an effect on the portfolio as a whole.
In addition, real estate investment trusts must pay out a sizeable portion of their profits to shareholders in the form of dividends. As a result, equity REITs can offer attractive dividend yields to their investors, especially when compared to other fixed-income investments that may not keep up with inflation.
However, investors should be aware that REITs carry risks similar to those of any other type of investment. Equity real estate investment trusts (REITs) can be affected by economic downturns, shifts in real estate market conditions, and interest rate fluctuations.
Finally, equity REITs provide investors with exposure to real estate appreciation and rental income that, on average, grow faster than prices due to inflation.
These businesses facilitate entry into the real estate market and add diversification to an investor’s portfolio. However, before making any investment decisions involving equity REITs, prospective investors should do extensive research and consider their risk tolerance.
Pro Tip: Research the REITs, their underlying properties, and the financial health of the company thoroughly before making any commitments.
#10. Diversified Portfolio
As the saying goes, “Don’t put all your eggs in one basket,” or risk all you have on the success or failure of one thing.
“Don’t put all your eggs in one basket.”
Building a diversified portfolio is a core tactic used by investors to minimize loss and maximize gain. You can spread your risk and make sure you have exposure to assets that can grow at a faster rate than inflation by constructing a diversified investment portfolio.
Spreading risk and maximizing returns both depend on proper asset allocation. To lessen the effect of any one investment’s performance on the portfolio as a whole, investors often diversify their holdings across multiple asset classes, industries, and geographical regions.
If investors want to have a chance to outpace inflation, they need to make sure they have exposure to assets that can do so. Stocks, bonds, real estate, commodities, and other inflation-hedging assets are common components of a well-diversified portfolio.
The performance of one asset class may not be directly correlated with that of another, depending on the state of the economy. In times of economic or market volatility, diversification among these assets can help investors weather the storm.
For instance, stocks have greater growth potential and, over time, can produce returns that exceed inflation. However, they tend to be more unstable. Bonds, on the other hand, are safe and pay interest, but they may not keep pace with inflation.
It is crucial to allocate one’s assets strategically, taking into account one’s risk tolerance, investment objectives, and time horizon. Although real estate and commodities can be useful inflation hedges, they are not risk-free investments and have their own peculiar market dynamics.
Since they have more time to ride out market fluctuations, younger investors with longer time horizons may choose to allocate a larger portion of their portfolio to growth-oriented assets like stocks. Income-generating assets, such as bonds and dividend-paying stocks, may be preferred by retirees and risk-averse investors who seek a more conservative allocation.
To reduce your exposure to risk while still trying to keep up with inflation, constructing a diversified investment portfolio made up of different types of assets is a good way to go.
In this strategy, asset allocation plays a central role by enabling investors to mitigate risk and maximize return following their circumstances and objectives. Investors can weather economic storms, protect their wealth, and pursue their long-term goals with the help of a diversified portfolio that is carefully planned and closely monitored.
To keep your portfolio well-diversified, asset allocation should be rebalanced regularly. Asset returns can deviate from their original allocation percentages as market conditions change. To rebalance a portfolio, sell some holdings and put the proceeds towards buying others that are under-represented. This ensures that the portfolio continues to reflect your risk tolerance and return expectations.
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Since inflation can eat away at purchasing power over time, investors must pick strategies that can outpace or keep up with inflation. Investments in stocks, real estate, inflation-protected securities, commodities, and other inflation-hedging assets can help protect your wealth and maintain your purchasing power, but no investment is completely immune to inflationary pressures.
Before making any investment decisions, you should carefully consider your risk tolerance and long-term financial objectives. Meeting with a financial advisor can help you create a plan tailored to your unique circumstances and needs, increasing your chances of success in the long run despite the effects of inflation.
Disclaimer: This article contains some machine-written sections. The views and recommendations presented on this website are those of the authors alone. Never use them without first evaluating your own personal and financial situation or consulting your professional investment advisor, as they are not and should not be construed as professional financial investment advice. Real estate, like all investments, is highly risky and subject to market fluctuations. Please do your own research before taking any of the steps we recommend, as we cannot and do not guarantee that following our advice will result in any positive outcomes.
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Priya Florence Shah is a bestselling author, an award-winning online publisher, and an online branding consultant. Download her free personal branding eBooks and check out Devi2Diva, her book on emotional self-care for women. In her spare time, Priya writes science-fiction novels and poetry and chills with her two-legged and four-legged kids.