You probably had a look at the title on how to profit from inflation and thought of it as absolutely absurd, right? I bet you’re not the only one. Believe it or not, investing during inflation is possible, and you can win while you’re at it too!
People usually think of recessions and inflation as troublesome issues, but if you prepare yourself properly, they can be great opportunities! I see them as a sale. On what? Well, you need to read more to get the whole picture.
Nothing in this world is entirely good or entirely bad, there are pros and cons to everything. The same goes for inflation. Yes, I’ll admit, inflation is largely bad because it turns our finances upside down and makes us all live in a constant state of fear. Financial uncertainty aside, you can make inflation work for you and be one of the people that benefit from it.
“The pessimist sees the difficulty in every opportunity. The optimist sees the opportunity in every difficulty” – Winston Churchill
Why inflation matters
If you’re wondering if investing successfully during inflation is possible, the short and sweet answer is yes. But there are some considerations though, so don’t just walk blindly into it. I’ll talk you through it.
Inflation secretly has a massive effect on your long-term stock returns, and I really think it’s going to be a HUGE issue for years. Yes, I’m not here to sugarcoat things. I’m here to share the cold, hard truth with you. At the same time, I want to equip you with the right tools, knowledge and mindset on how to profit from inflation (YAY!).
Okay, back to why inflation matters. Besides the stock market, inflation affects pretty much all aspects of the economy. If interest rates and taxes rise, everyone’s going to feel the pinch, even if you have a few of the “traditional investments” here and there.
The normal investments
Put simply, the normal investments that are usually recommended
aren’t actually very good at protecting you from inflation. Here’s why:
In theory, gold should hold its value because gold will be gold forever, but it’s hard to pin down a price for it and it ends up fluctuating randomly. While forecasting inflation rates is possible, it can be quite difficult to forecast the price of gold at any given point in time. In fact, that’s the case with most commodities.
So, what does that mean? You can try as hard as you can but making hedging decisions when you can’t forecast one from the other can be a MEGA CHALLENGE. When it comes to how to profit from inflation, I’d pass on gold. Next!
Bitcoin has the same idea as gold, it’s limited and people like it so its value shouldn’t drop. Well, it sucks. It’s super volatile and has zero intrinsic value. So as far as I can tell, it’s just bad
gold. It’s extremely volatile.
In fact, all you have to do is take a look at how the value of Bitcoin, and cryptocurrencies in general, has plummeted in recent months. Think about it, its price and value is largely based on consumer sentiments, so it’s not a good idea for inflation investing.
Come to think of it, proponents of Bitcoin have been forced to reassess their initial beliefs. With the growing inflation, one would expect the value of Bitcoin to be increasing, which isn’t the case. This just goes to show that Bitcoin is unpredictable and not the best of choices for hedging against inflation.
Warren Buffett is a smart guy, and he feels the best solution to recessions and inflation are picking the right stocks. As a whole, I’m not a believer that it’s worth the effort. And even if you do nail that, it’s not much different.
Even if the company isn’t crushed by inflation, if there’s an inflation-driven recession, its stock will drop. It’s just market perception and that’s what affects stock prices.
So, what are the best investments?
Okay, enough of the bad news for now. Here’s a section on how to profit from inflation. Basically, things that are inflation-adjusted and not affected by people’s economic perceptions are the best investments!
When it comes to inflation investing – and pretty much any other investing for that matter – spreading the risk will be most beneficial to you. Therefore, diversifying is not to be overlooked, no matter what market conditions are like.
Your salary is inflation-adjusted by design, it’s part of what drives inflation. If you invest in yourself so that you can get a salary boost to your already inflation-adjusted income, that’s a big win for you. It’s one way of investing during inflation; investing in yourself instead of the
so-called “inflation-proof” things that are popularized.
There are always some skills that are always in high demand; right now, I’d say digital skills are a must! Investing in yourself and equipping yourself with those skills to provide value to your company or own business will serve you well in the long run. Be it to get you a salary increase or to get you more clients. Invest in something that’s in high demand.
I’ve had a close look at the likes of Bill Gates, Ted Turner and John Malone. What do they all have in common? They’ve all invested in farmland, which is one great way of investing during inflation. In fact, if you’re looking to hedge against inflation and perhaps try something other than stocks, then farmland may be what you’re looking for.
Contrary to popular belief and the history of investing in farmland, it’s no longer just the outliers and wealthiest people in the world that can turn to farmland. It’s possible for you to also get a piece of the pie as a way of investing during inflation.
If you’ve had a look at REITs (real estate investment trusts), you’ll know that investing in farmland isn’t a one-size-fits-all approach. Each REIT has a different strategy, meaning that you can pick the right one for you depending on your personal preferences and risk appetite.
I have a whole article on this with more resources and breakdowns.
Here’s something you probably didn’t expect – own debt. It’s the opposite of cash, which is painfully hurt by inflation. Given that inflation decreases the value of money over time, having cash on hand and doing nothing with it means that you’ll end up having MUCH less in the future.
What is $100 today may only be able to afford you $65’s worth of goods in years to come if its cash on hand.
When it comes to debt, though, it works in your favor as the borrower at a fixed rate. It means you get to pay back money worth less than what you actually borrowed (sneaky!). But of course, this doesn’t mean you should max out your credit card for the sake of falling into debt, there’s no good in that.
It just means if you borrowed money to put into some worthwhile investment, you get away with paying a lower value because of inflation and the time value of money. So, if you managed to borrow and lock in a fixed interest rate, good for you!
Picture this: You’ve spent the past few months daydreaming about your ideal home and just weeks after finding it, you notice a shift in the market. Sure, it’s been a long time coming, but the impact of rising Interest rates and inflation can no longer be ignored. So, you have to put your homeowner dreams on hold and continue renting until things are a bit more promising.
That’s the harsh reality for a lot of people. It’s because of this very reason that rental houses can be a great way of investing during inflation. Even better, if you purchased that rental property using debt and you’re earning rental each month, that’s a win-win situation! Good job.
Will interest rates always rise with inflation? Yes, but interest rates will only temporarily be high, and they won’t be as high as inflation. Check this out.
If you take out a $500,000 property loan at an annual interest rate of 4% over 5 years, you pay $100,000 interest (simple math = $500,000 x 0.04 x 5). Sounds like a lot of money but if there is 8% inflation in the mix then the $500,000 loan will really have dropped by $200,000 equivalent after 5 years.
Essentially, the true value of the $500,000 loan dropped to $300,000 in 5 years’ time, which is more than you will have paid in interest! Add in principle payments and your loan is practically non-existent after 5 years.
TLDR – Investing During Inflation
- Investing during inflation is possible and advisable if you know what to invest in.
- It’s not always the normal investment options that can protect you from inflation.
- Investing in yourself, farmland, debt and residential property are all great ways of hedging against inflation.
- Regardless of market conditions, diversifying is a BIG YES so you can spread the risk across different investment options – just be smart about it.