The FED’s target yearly inflation rate in the U.S. is about 2%, but the long term average is more like 3% and depending on ongoing economic conditions, this rate can significantly increase, affecting the financial health of individuals across the country. Though keeping an eye on the economy can help you make decisions to brace against the impact of inflation, developing sound investments can help you protect your wealth no matter the rate. Take a look below for a few central items to consider when preserving your finances against inflation.
Diversify your Portfolio
Portfolio diversification is crucial for maintaining optimal financial health. Your investments should vary in asset class and risk. The market for different investment classes does not always correlate, so diversifying your investments to include physical tangible assets within different industries works best. When building your portfolio, you should examine a wide range of stocks, bonds, and physical investments like real estate or businesses. In general, you should aim to have your portfolio consist of 60% stock investments and 40% fixed-income assets.
Diversification is the best option for long-term investment success. Putting all your funding into one asset class can disrupt your financial wellness. For example, during times of inflation, you should avoid long-duration fixed-income funds. As interest rates rise fixed-rate investments like bonds fall so bonds indexed to inflation would perform better.
Invest in Real Estate (At Your Own Risk)
Historically, real estate has performed well during periods of inflation. Depending on the location, property ownership can be lucrative. You can purchase a fixer-upper and renovate it, tailoring these fixes based on market research to maximize your return on investment. For homes that are in great condition but need a little TLC, a simple remodel can offer as much as a 69% ROI. In cities like Boston where there is an abundance of colleges and large businesses, the demand for housing is always high, making it the market favorable for property owners. However, many risks come with renting out your property.
First, you may end up renting to tenants who either do not treat your property well or may not have the funds to continue paying rent at some point. This can lead to a lengthy legal battle that can have a harsh impact on your finances. Second, if you are short on cash and need to liquidate an asset fast, real estate will not provide you with quick funds. It takes two months or more on average to sell a home from listing to closing – for luxury properties, you can expect to wait triple this time or more for a final sale. And if you over-price your listing it could take much longer.
One way to invest in real estate but avoid the hassles of sale and management is to invest in a Real Estate Investment Trust (aka. REIT) these invest in a variety of different types of real estate from residential to commercial, and storage facilities to farmland. So, you can tailor your investment to the current trends. At the moment, commercial and office buildings aren’t doing well as more and more companies are expanding their work from home operations so office space is becoming less in demand.
Invest in Precious Metals
Preserving your wealth requires investments that will continue to have intrinsic value no matter the current market conditions. Some experts recommend putting at least 5% of your investment portfolio into precious metals such as gold or silver. During economic instability, the price of gold tends to perform well. Since gold and precious metals are extremely liquid, it can be easy to receive a return when you need cash. Currently, gold prices are soaring, recently reaching $2300/ounce. Gold can also be a “Crisis Hedge” against uncertainties like war and other disruptions.
If you don’t want to store physical gold, a self-directed precious metals IRA is an option that provides portfolio security. To set up this account, you must find a qualified precious metals dealer to purchase the gold from. You also must find a custodian to store the physical bullion. With a precious metals IRAyour gold must be stored in a secure facility, like a bank – it cannot be simply kept in a safe at home. Depending on the custodian you choose, the minimum initial investment can varyso choose a custodian that works within your budget.
Utilize Stock Market Investments
Stock investments allow for a lot of freedom and variety. You can choose to invest in different types of companies and commodities that vary in performance and risk. When preparing to deal with inflation, there are a few stocks that many investors gravitate toward as a hedge. Consumer staples stocks like Walmart, Coca-Cola, and Unilever perform well even amidst economic strife. Since people will continue to purchase food and household necessities in high volumes, even during economic uncertainty, this is a preferred defensive investment.
As mentioned before, the gold industry provides a good defensive investment opportunity as well. But, you don’t have to only invest in physical gold – ETFs (Exchange-Trade Funds), are available for those who wish to invest in companies or commodities without the trouble of physical property ownership. Purchasing commodity ETFs, for example, can allow you to experiment with certain industries without committing to a hefty investment. You can also take on equity ETFs, which allows you to invest in the performance of precious metals companies rather than the commodity itself.
When investing in stocks and ETFs, you should think critically about the companies you are willingly becoming part of. You should have a long-term plan in place for your investments and stay up to date with the performance of each company and commodity you have a stake in. Find time every few months to examine your portfolio and look for areas of improvement. It is worth mentioning, though, that becoming obsessed with the daily performance of your stocks isn’t good for your investment either. Take some room and think about the direction of your current stock investments to avoid making any rash purchasing decisions.
As you continue to analyze and build your investment portfolio, always consider the effects of inflation on your return. Take risks, but do so thoughtfully. Your best bet is to lay out a set of long-term goals and collaborate with a financial advisor about the best ways to achieve them. In the meantime, experiment with stock market investments and look deeper into high-risk physical investments to get a better idea of what works for intentions.
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