How should you defend against Inflation? What are the best investments against Inflation? How does Inflation affect your wallet? I answer all of these questions in today’s video!

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Timestamps:
0:00 – Start Here
0:55 – Format of Today’s Video
1:20 – Quick Background
2:02 – How Inflation Impacts You (Short vs Long Term)
4:25 – 4 Things Inflation Affects
7:14 – Best Investments to Protect Against Inflation

Inflation in the short term doesn’t typically have a negative effect on stock prices, however, what we’re seeing is that because of the looming EXPECTATION of inflation, we’re seeing rates rise, and when interest rates rise, that’s what usually has a negative effect on stock prices.

The reason is simple, let’s pretend the interest rate that the bank offers you is 12% on your money, and it’s risk free, and you know that the stock market historically returns 8%, but it carries risk. Logically speaking, if you could get 12% risk free and beat out the market, then you’re going to invest your money into the bank, and not invest in the stock market – you might even move some or all of your money out of the market into that 12% yielding return.

Now, interest rates aren’t at 12%, but rising interest rates, or rising yields elsewhere are causing a chain-reaction type effect where investors, specifically, institutions will be moving around their money based on what the yields and rates are. Even small movements in interest rates or yields can cause big movements when it comes to allocation of investment funds.

So in the short term, inflation might affect interest rates. Higher interest rates usually are correlated with lower stock prices. When interest rates are low, that’s when you see stock prices go up.

In terms of how inflation affects you in the long term, most financial planners assume the average rate of inflation to be between 2-3%, which means that in the long term you should aim to get at minimum 2-3% back on your money, or get a raise at work, or increase your income by about 2% a year. If you’re able to invest in yourself consistently, you could even find that your income raises at a bigger rate than inflation.

Best Investments Against Inflation:
1. “TIPS”, or Treasury Inflation-Protected Securities. These securities are linked to inflation at a 1:1 ratio, so basically if inflation goes up, your investment goes up proportionally along side it.

In terms of buying TIPS, they’re available via ETFs like ticker symbol IVOL, TDTF, or SCHP.

The thing with these TIPS is that they’re mostly going to underperform the broader market, but will offer more stability and less risk.
For example, SCHPs’ average annualized return for the past 5 years is only around 4%, compared to the S&P 500 which has an average annualized return of about 16% The difference is that the downside may be greater with equities compared to TIPS.

#2 Stocks

Stocks are still a great place to put your money to protect against inflation, especially in the long term. The stock market is going to be more risky than buying TIPS, but it should also provide an average annual return of around 8% if you hold it for long enough.

#3. Diversify
Diversifying your money across different investments, not just stocks – will be a good defense against inflation because you’re investing it but also accounting for possible downturns in the market.

For diversification purposes, I think real estate is a good hedge against inflation, because if you own a piece of land or property – that land/property will continue to be there, and if inflation does occur, your piece of property will continue to appreciate as well. It could also be a great hedge because you may be able to lock in an interest rate right now.

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😺 WHO AM I: I am not a cat. My name is Humphrey Yang, I’ve built multiple businesses and am passionate about Personal Finance, Investing, among other things! If you’re trying to build a solid foundation of financial literacy, learn to invest, or become financially free – then I’m here for you!

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PS: I am not a Financial Advisor, any investment commentary are my opinions only. Some of the links in this description are affiliate links that I do receive a commission for….(read more)

LEARN ABOUT: Investing During Inflation

REVEALED: Best Investment During Inflation

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With the pandemic raging on across the globe, governments are spending trillions of dollars to keep their economies afloat. While it is a necessary measure, it is also a cause for concern as inflation looms in the near future. Inflation, the rise in prices, is harmful to people’s purchasing power, especially if it is high, persistent and volatile.

The impact of inflation is widespread and can lead to increased uncertainty, reduced investment and diminished economic growth. With a surge in demand and supply chain disruptions, prices are already climbing, and it’s crucial to be proactive in safeguarding one’s finances. Here are some ways to beat inflation:

1. Invest in Real Assets: Inflation hurts papers assets such as bonds and stocks, but physical goods like real estate, gold and other metals tend to increase in value. Investing in these types of assets will help to retain value during inflationary periods.

2. Diversify your Portfolio: Don’t put all your eggs in one basket. Diversify your investments by spreading them across various asset classes – stocks, bonds, real estate, commodities, etc. It will help one mitigate risk and protect against inflation.

3. Invest in Stocks that Benefit from Inflation: Certain stocks, such as those in the energy, utilities and healthcare sectors, perform better in inflationary periods. Investors can add them to their portfolio to offset the impact of inflation.

4. Invest in Fixed-income Securities: Treasury Inflation-Protected Securities (TIPS) help protect against inflation by adjusting the principal value based on Consumer Price Index (CPI) changes. These bonds are an excellent long-term investment to beat inflation.

5. Invest in Foreign Currencies: Inflation often affects one currency, while others remain more stable. Investing in foreign currencies, particularly those from nations with stable political and economic climates, can diversify one’s portfolio and provide a hedge against inflation.

Inflation is a persistent and ever-present risk in the economy. However, it is possible to beat inflation by being proactive and taking precautions. Investing in real assets, diversifying your portfolio, investing in stocks and fixed-income securities, and investing in foreign currencies can all help protect against inflation. Don’t delay; protect your finances today before it’s too late!