Best Investments to Beat Inflation – Forbes Advisor


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Rising prices have become an inescapable reality for most Americans. You hear about inflation on the news, you see it in the grocery store, and I hope you’ve thought about the impact of inflation on your investments.

“Inflation is the silent wealth killer,” says Chris Berkel, investment advisor and founder of AXIS Financial in Edmond, Okla. “Inflation has the potential to erode the purchasing power of an investor’s portfolio, even if it maintains positive returns year after year.

Your long-term investments will need to return at least 3.7%, the average US inflation rate going back to 1960, so as not to lose ground. Here’s a look at investments that have stood the test of time helping investors fight inflation.

Fight inflation by investing in gold

Gold is the oldest hedge against inflation. The yellow metal has registered an average annual gain of 9.48% over the past 20 years between September 2001 and September 2021. During the same period, inflation has averaged 2.4%, offering investors a rate of return of 7.08%.

Don’t waste your life savings on gold as there are other factors you will need to understand before investing in gold.

If you invest in physical gold, there are additional costs associated with storing and insuring coins and bars, which eat into your returns. Investing in gold-focused mutual funds and exchange-traded funds (ETFs) can significantly reduce these costs, but it is always important to remember that the price of gold is very volatile, especially in the short term. .

You will also need to understand whether the fund of your choice is aimed at tracking the price of gold or rather gold mining companies. Both can be decent ways to gamble in the gold market, but their returns can vary widely.

Invest in stocks to beat inflation

Investing in a diversified portfolio of stocks is a great way to fight inflation. From September 2001 to September 2021, the S&P 500, a key benchmark for US stocks, generated an average return of around 9.5% (dividends reinvested). After factoring in for inflation, you’re still looking at average annual returns of around 7%.

Even with today’s substantial price gains, you would still have beaten the price hike: From November 2020 to November 2021, inflation rose by almost 5%. During the same period, the S&P 500 jumped over 32%, with dividends reinvested.

You don’t really have to resort to individual stock picking, which can be research intensive and incredibly risky, to benefit from this kind of historic growth. Start by choosing an S&P 500 index fund or an S&P 500 ETF, which tracks the performance of the index and keeps costs ultra low. Because they contain hundreds of stocks, they offer simple and inexpensive diversification, reducing the risks and headaches of portfolio management.

Remember that investing in stocks is never without risk. You can lose money in the short term, and with equity index funds you can’t choose which companies the fund invests in. an environmental, social and governance (ESG) fund instead.

Fight inflation with real estate

Many investors averse to inflation turn to real estate to hedge their holdings, although the size and variability of the market can make it very difficult to generalize about this particular asset class.

Analysis by the Massachusetts Institute of Technology (MIT) found that commercial real estate turned out to be the best category of real estate to beat inflation, while apartment buildings and industrial properties did a little worse . MIT’s analysis attempted to take inflation growth, maintenance costs, and appreciation into account when deciding what type of real estate performed best over the long term.

Owning single family homes can provide hedge against inflation, depending on local market conditions. Taken as a whole, home values ​​in the United States have experienced an average annual growth of 4% since 1991, according to the Federal Housing Finance Agency. But this data does not take into account maintenance or other costs.

Here’s the problem with buying real estate: It requires big buy-ins and a variety of financing and maintenance costs. This is why real estate investment trusts (REITs) can offer regular investors an easy way to diversify their portfolios and obtain the benefits of real estate inflation hedging.

When you invest in REITs, it is like buying a fund that exclusively holds real estate assets. Regulations require them to pay regular dividends, which makes them particularly attractive to income investors.

And REITs have historically offered strong performances: In November 2021, the MSCI US REIT Index was up almost 32% for 2021, and its average annual return over the past decade was 10.90%. It’s a great way to fight inflation.

TIPS are designed to beat inflation

Inflation Protected Treasury Securities (TIPS) are designed to protect your investment from rising prices. The US Treasury sells TIPS and adjusts their face value each year to keep up with inflation. This increases your interest payments and also ensures that you will also see some appreciation for inflation adjustments.

While the inflation-shielding aspect of TIPS may make them attractive, remember that they will really only be able to preserve purchasing power, not necessarily ensure growth. Over the past 10 years, the iShares TIPS Bond ETF, which tracks a TIPS index, has had average annual returns of just over 3%.

If you are investing in TIPS, you will also need to watch out for deflation. While you will never receive less than the original face value of a TIPS when it matures, its value may decline further while you receive interest payments.

Fight inflation with bonds I

Series I Savings Bonds, better known as I Bonds, are another government-issued security designed to fight inflation.

Like TIPS, they preserve the purchasing power of your money by making regular interest adjustments based on prevailing inflation. Unlike TIPS, they do not change the face value of your bond; instead, they change interest rates every six months based on current inflation.

It can work very well for you these days. Interest rates are above 7% until at least April 2022. But bond interest rates are constantly changing and can go as low as zero. This means that while you are assured of not losing your initial investment, it can still be eaten away by inflation over time if interest rates fall.

Additionally, I Bonds come with pretty onerous foreclosure dates. You can’t cash an I Bond for at least a year after you buy it, and for the next four years you’ll owe three months of interest as a penalty if you cash it in, much like a certificate of deposit. (CD).

About Terry Simmons

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