What The Inflation Surge Means For Your Investments

In April 2021, the annual inflation for the United States was over 4 percent. This is one of the largest rises this economy has ever seen, and the highest ever in more than a decade. If this sort of inflation rate continues, it’s rarely good news for any investor. 

Whether you’re a real estate investor or have a stock portfolio, the risks for losses and stagnancy are quite high. If you have the usual 60/40 portfolio of stocks and bonds, you might have to suffer losses on each end. The price of bonds will fall while the prices for stocks will rise. 

Usually, a 60/40 portfolio will give a 9 percent return per annum but high inflation will make it more like 2 percent. Even before we adjust for inflation, stocks aren’t a really cheap option these days. 

If you want to make the most of your investment and cut losses, you need to know the options available. Then, you should decide what’s best for your investment future. Below are a few of the most important points to consider at this time: 

1. Consider Investing in Commodities

Researchers from places like Duke University have conducted research on the historical success (or failure) of investment strategies over the years. In a nutshell, the winner so far seems to be commodities. During times of high inflation, these have overall proven to be a sound investment. 

This information seems logical, as high prices also mean that the value of your goods and services will rise as well. Commodities like metals, energy, and agricultural produce will all rise in price when there’s high inflation. 

The Risks of Investing in Commodities

Of course, putting all your bets on one single commodity is still quite risky. Gold is a favorite among investors, but it’s only risen around 66 percent of the time when there’s a high inflation environment. This is the reason why it’s wiser to have a variety of commodities in your investment basket. 

Try to find items that are likely to increase in price with passing time; this could include artwork or stamps as well as collectible items like antique jewelry. You might have to look around a bit to see what seems like the safest or most lucrative option, but it’s worth putting in the time and effort. Who knows, you might already have some valuable collectibles lying around, like discontinued toys, board games, or promotional items. 

However, even investing in commodities won’t be much of a safety net if the inflation sees a sharp decline. The return on such commodities will be the highest when there’s a high inflationary period. When inflation is low or none, commodities might even lose their value. 

Furthermore, you might also be too late for the game. Some commodities can spike very early, so you won’t be able to cash in for much. 

2. Consider Rising Stocks

High inflation tends to affect everything. So, investing at the sector level might not be a wise idea yet. Some might think that energy stocks will perform decently with the rising energy prices. However, this is sadly not true. While the energy sector might do better than most others in the economy when inflation is high, history delivers a warning. The returns on energy stocks during such a time have hardly been worth the effort when we take past experience into account. 

The good news is that it’s still technically possible to spot some rising stocks at the factor level during a period of high inflation. However, this seems to be more of a matter of momentum than anything else. The stocks that you see rising right now might have a tendency to go even higher. But you’d be safer planning for just the short run in this case. 

3. Think About the Future

The main question here, and the one most difficult to answer, is what this surge in inflation means for the economy. Does this mean that we can expect a more normal environment, with supply chains flowing more easily? Or is this high inflation the sign of harder days to come, of increasingly high prices that will make most of the population struggle financially?

Basically, we need to estimate how long the inflation rate will last and how high it will rise. The high government spending and the boom after the vaccine mean that consumers are also likely to increase their demands for traveling, shopping, and dining out. In this situation, American investors just might have to prepare for an inflationary storm. If the price increases get too high, the interest rates might rise very quickly. 

On the other hand, some experts are of the opinion that the American economy is facing these increases only temporarily. The main issue, they claim, is to do with supply bottlenecks. With certain projections, inflation just might balance out in the near future (perhaps even as soon as next year). 

4. When Should We Worry?

Expertise and history tell us that investors should only be really worried about inflation when it becomes very pronounced and sustained. On the bright side, such a phenomenon hasn’t taken place in several decades.

Economists also say that unless the labor market in the United States gets on track, this issue is unlikely to occur. With around 3.5 million people added to the unemployed percentage since February 2020, the labor market doesn’t seem set to recover anytime soon. There’s also the fact that there are fewer jobs in the United States economy right now. Such factors might not be good news for everyone, but it does mean that investors can breathe a little. 

5. Protect Your Finances

Whether you’re looking for mobile homes for sale or possibly rising stocks, here are some steps before facing a possible inflation boom. Whether this boom is sustained or not, the following points might come in handy:

• Investors shouldn’t think about a drastic change in their portfolios, but they should diversify it with inflation-safe options. 
• Investors should recognize that a fail-safe inflation edge is not possible, so their portfolio should have components that are likely to do well in high inflation.
• If you’re on a fixed means of income, take extra care with making a game plan for inflation; this means limiting fixed-rate returns as well as cash hoarding. 
• Inflation-linked securities and short-term securities are good bet in such cases; bonds with longer dates can take a massive hit when there’s high inflation. 
• Consider TIPS (Treasury-Inflation Protected Securities); these are a sort of inflation-indexed bonds that can provide some more cushioning than the traditional variety.
• Go for growth stocks, consumer staples, and equities that pay dividends. This way, you can pass along the higher inflammation to customers. Companies usually go for this method and end up with a higher value. Being a stockholder will give you better odds of beating inflation. 
• If you have a long-term view in mind, think about incorporating specific equities in your portfolio. 

The Takeaway

Fortunately, inflationary phases like this recent one aren’t too common. If there’s one year of problematic inflation, the American economy usually gets five or four years of steady or even declining inflation rates. If you adopt a certain strategy for inflationary times, these might backfire when the economic outcome changes. 

At the end of the day, it’s always a risk to adjust for anything that’s temporary. Inflation rates are one of these factors, especially as they sometimes don’t play out according to predictions. Take your time and ponder all your options, but remember not to burn your boats along the way.