Podcasts > Money Rehab with Nicole Lapin > Four Inflation-Proof Investments

Four Inflation-Proof Investments

By Money News Network

On Money Rehab with Nicole Lapin, this episode examines investment opportunities to hedge against inflation. It explores how asset classes like stocks, bonds, real estate, and cryptocurrencies respond to rising prices. The summary outlines inflation-proof investment options such as I bonds, TIPS, and short-term securities that can protect purchasing power.

The blurb also touches on strategies for consumers to maximize their spending amid inflationary pressures. From utilizing credit card benefits to taking advantage of sales, it provides tips to help individuals better navigate financial challenges caused by rising costs.

Four Inflation-Proof Investments

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Four Inflation-Proof Investments

1-Page Summary

How Investments React to Inflation

During inflationary periods, various investment classes respond differently. According to the summary, stocks can have mixed performance, with consumer staples faring better due to their pricing power, while high-growth companies struggle due to rising interest rates. Traditional bonds tend to underperform as their fixed income is eroded by inflation.

Real estate can serve as an inflation hedge, the summary states, as property values and rental income often keep pace with or outpace inflation. However, the real estate market is influenced by factors beyond just inflation. Cryptocurrency, known for its volatility, has not historically proven to be a reliable inflation hedge or stable store of value.

Inflation-Hedging Investment Options

The summary outlines several investment options that can help mitigate the risk of inflation eroding purchasing power:

  • I bonds, which adjust their yields twice a year to match inflation, currently earning around 3.1%.
  • TIPS (Treasury Inflation Protected Securities), where the principal adjusts for inflation instead of the interest rate.
  • Short-term securities like Treasury bills and CDs, providing interest earnings to offset inflation's impact.

The summary also offers strategies for consumers to make the most of their purchases amid inflationary pressures:

  • Taking advantage of Black Friday sales before potential tariffs raise prices on Chinese-made goods.
  • Utilizing credit card benefits like extended warranties to maximize purchase value.
  • Staying proactive in managing finances to avoid rushed decisions later due to rising prices.

1-Page Summary

Additional Materials

Clarifications

  • I bonds are a type of savings bond issued by the U.S. Treasury that are designed to protect against inflation. Their interest rates are adjusted semi-annually based on changes in the Consumer Price Index. This adjustment helps I bonds maintain their purchasing power over time, making them a popular choice for investors looking to hedge against inflation.
  • TIPS (Treasury Inflation Protected Securities) are U.S. government bonds designed to protect investors from inflation. The principal value of TIPS adjusts with inflation, which means the interest payments increase with inflation, providing a hedge against rising prices. They offer a guaranteed real rate of return above inflation, making them attractive during inflationary periods. TIPS are considered a relatively safe investment option due to their backing by the U.S. government.
  • Treasury bills are short-term debt securities issued by the U.S. government with maturities typically ranging from a few days to one year. They are considered low-risk investments and are sold at a discount to their face value, with the difference being the investor's return. Treasury bills are often used by investors as a way to preserve capital and as a relatively safe haven during uncertain economic times. They are also commonly used by the government to raise funds to finance its operations.

Counterarguments

  • While consumer staples may fare better during inflation, not all companies within this sector are guaranteed to perform well due to competition, supply chain issues, or management decisions.
  • Some high-growth companies may still perform well during inflation if they have innovative products or services that continue to drive demand despite rising prices.
  • Real estate investments can be affected by local market conditions, interest rates, and other economic factors that may not always correlate with inflation trends.
  • Cryptocurrency's role as an inflation hedge might evolve as the market matures and if it becomes more integrated into the financial system.
  • I bonds and TIPS are tied to official inflation measures, which may not capture the full extent of inflation experienced by consumers in their everyday expenses.
  • Short-term securities like Treasury bills and CDs may not always keep pace with inflation, especially after taxes are taken into account.
  • Black Friday sales may not always offer the best deals, and tariffs may not necessarily impact the prices of goods immediately or as significantly as suggested.
  • Credit card benefits like extended warranties are valuable, but they also encourage consumer spending, which can be counterproductive in managing finances during inflation.
  • Proactive financial management is important, but consumers may face systemic challenges that make it difficult to avoid rushed decisions, such as unexpected expenses or economic downturns.

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Four Inflation-Proof Investments

How different investments perform during inflation

As inflation affects the economy, different investment classes respond in varied ways, influencing investors' decisions and portfolio performances.

Stocks can have mixed performance, with consumer staples and high-growth companies impacted differently

During inflationary periods, the stock market shows mixed reactions.

Companies with strong pricing power like consumer staples tend to do better, while high-growth companies suffer from rising interest rates

Consumer staples, which consist of household goods and food, often have strong pricing power, allowing them to perform well during inflation since they can pass on higher costs to consumers. Conversely, high-growth companies typically see a downturn due to the impact of rising interest rates, which make their future earnings look less valuable.

Traditional bonds tend to underperform in inflationary environments due to the erosion of fixed income returns

The fixed returns from traditional bonds are eroded during periods of inflation, which means they generally underperform as the purchasing power of the income they provide decreases.

Real estate can act as an inflation hedge, with property values and rental income keeping pace, but the market is influenced by other factors

Real estate investments can serve as an effective inflation hedge, with property values and rental income frequently keeping pace with or surpassing the rate of inflation. However, th ...

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How different investments perform during inflation

Additional Materials

Clarifications

  • During inflation, consumer staples companies, which sell essential products like food and household goods, tend to perform better as they can pass on higher costs to consumers due to their strong pricing power. On the other hand, high-growth companies may struggle during inflationary periods because rising interest rates can impact the perceived value of their future earnings.
  • Rising interest rates can negatively impact high-growth companies because they rely heavily on borrowing money to fuel their expansion. As interest rates increase, the cost of borrowing rises, leading to higher expenses for these companies. This can reduce their profitability and make their future earnings projections less attractive to investors, causing their stock prices to decline.
  • Inflation erodes the purchasing power of money over time, meaning that the same amount of money buys fewer goods and services. Traditional bonds typically offer fixed interest payments, so when inflation rises, the real value of these fixed payments decreases. This results in a situation where the fixed income returns from traditional bonds are worth less in real terms during periods of inflation.
  • The performance of the real estate market as an investment vehicle beyond inflation is influenced by factors such as location desirability, economic conditions, intere ...

Counterarguments

  • Stocks may not always show mixed reactions; in some cases, entire markets can trend downwards during high inflation due to decreased consumer spending and increased costs of capital.
  • Not all consumer staples companies may have the pricing power assumed, especially in highly competitive markets or where consumers can easily switch to cheaper alternatives.
  • Some high-growth companies may be less affected by rising interest rates if they have strong balance sheets, low debt, or operate in sectors less sensitive to interest rate changes.
  • Certain types of bonds, such as inflation-linked bonds or floating-rate notes, may perform well during inflationary periods as their interest payments adjust with inflation.
  • Real estate markets can also be adver ...

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Four Inflation-Proof Investments

Inflation-hedging investment options

Inflation can erode the purchasing power of your money, making it imperative to consider investment options that can help mitigate this risk. Here are a few inflation-hedging investment options to consider.

I bonds

I bonds are a type of government security tied directly to inflation and can serve as a hedge against rising prices.

I bonds are tied to inflation and adjust their yields twice a year to keep up with rising prices

I bonds adjust their yields twice a year to reflect fluctuations in inflation, ensuring that the return keeps pace with the cost of living.

They can currently earn around 3.1% but the yield will increase if inflation rises further

As of the latest update, I bonds are earning about 3.1%. If inflation continues to rise, the yield on I bonds will increase accordingly, offering a higher return to investors.

TIPS (Treasury Inflation Protected Securities)

TIPS are another viable option for those looking to shield their investments from inflation.

TIPS are a type of bond where the principal adjusts for inflation instead of the interest rate

Unlike traditional bonds, where the interest rate might vary, TIPS feature a fixed interest rate, with the principal amount adjusted to mirror inflation rates. This ensures that the interest payments reflect the increased principal due to inflation.

They can be purchased directly from the Treasury or through brokerages

Investors can purchase TIPS through TreasuryDirect.gov or via various brokerages and secondary markets, providing flexibility and easy access for those looking to add TIPS to their portfolio.

Short-term securities like Treasury bills and CDs

For those seeking shorter-term investments, Treasury bills and Certificates of Deposit (CDs) provide opportunities to earn interest and protect against inflation.

These provide a way to earn interest and preserve the value of money, offsetting the erosion caused by inflation

Both T-bills and CDs ...

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Inflation-hedging investment options

Additional Materials

Counterarguments

  • I bonds and their interest rates:
    • While I bonds are designed to keep up with inflation, their semi-annual adjustment may not perfectly match real-time inflation spikes, potentially leading to short-term losses in purchasing power.
    • The 3.1% return on I bonds may not be attractive if real inflation is significantly higher or if alternative investments offer better returns.
  • TIPS and their inflation adjustment:
    • TIPS adjust the principal for inflation, but if deflation occurs, the principal can decrease, which may not be ideal for all investors.
    • The fixed interest rate on TIPS might be lower than the returns available from other investments, especially in a rising interest rate environment.
  • Treasury bills and CDs as short-term investments:
    • Treasury bills and CDs typically offer lower returns compared to other investments, which might not be sufficient to outpace high inflation rates.
    • The fixed return of T-bills and the interest from CDs might not be competitive with the potential growth from equity investments over the long term.
    • CDs require locking in funds for a certain period, which can be a disadvantage if interest rates rise after p ...

Actionables

  • You can create a personal inflation-protection strategy by allocating a portion of your savings to I bonds and TIPS, diversifying to benefit from both their unique inflation-adjusting features. Start by determining how much of your savings you're comfortable tying up in these longer-term investments, considering their respective adjustment mechanisms and your financial goals. For example, if you're saving for a goal that's five years away, you might decide to put 30% of that savings into I bonds and TIPS, adjusting the percentage as your comfort with risk and inflation expectations change.
  • Develop a ladder investment plan using Treasury bills and CDs to maintain liquidity while earning interest. Begin by purchasing T-bills and CDs with staggered maturity dates, such as every three months, so that a portion of your investment is always close to maturity and accessible for reinvestment or emergencies. This could look like buying a 3-month T-bill this month, a 6-month CD next month, and so on, creating a cycle where your money is continuously earning interest but also regularly available.
  • Use a financial app or spreadsheet to track the performance of your inflation-adjusted ...

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Four Inflation-Proof Investments

Strategies for making purchases and using financial tools to offset inflation

As inflation affects the economy, consumers are looking for strategic ways to make the most of their purchases and stretch their dollars further. Here are some strategies for navigating these financial stresses.

Black Friday is a good time to make major purchases, as prices for Chinese-made goods may rise due to potential tariffs

One strategic approach is to take advantage of Black Friday sales. This period offers the opportunity to make major purchases before the prices for goods manufactured in countries like China potentially rise due to tariffs. By timing purchases to coincide with these sales events, consumers can save money upfront and mitigate some of the inflationary pressures.

Utilize credit card benefits like extended warranties to maximize the value of purchases made

Another useful strategy is to utilize the benefits offered by credit card companies. Many credit cards provide extended warranties on items purchased using their cards, which adds an additional layer of value and protection. For instance, if a consumer makes a purchase with a MasterCard, the company may double the manufacturer's warranty for up to two years. This means if an item breaks down or needs repairs after the standard warranty period, the cost might still be covered.

...

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Strategies for making purchases and using financial tools to offset inflation

Additional Materials

Counterarguments

  • Black Friday sales may not always offer the best discounts, and some retailers inflate prices before applying discounts, making deals appear better than they are.
  • The best time to make a purchase is not necessarily during Black Friday; sometimes better discounts are available at other times of the year, especially for electronics.
  • Tariffs may not always lead to price increases if companies absorb the costs or if supply chains shift to avoid tariffs.
  • Credit card benefits like extended warranties often come with terms and conditions that may limit their usefulness, and not all credit cards offer the same level of benefits.
  • Relying on credit card benefits can encourage increased spending, potentially leading to higher debt, which is counterproductive in managing finances during inflation.
  • Being proactive in managing finances is important, but the specific strategies to do so can vary greatly depending on individual circumstances and may not always align with the strategies suggested.
  • Strategic planning of purchases is wise, but it requires accurate predictions of market trends, which can be difficult and uncertain.
  • Budgeting is crucial, but the effectiveness of budgeting strategies ...

Actionables

  • You can create a price tracking dashboard using a spreadsheet to monitor the prices of items you plan to buy, allowing you to identify the best time to make a purchase. Start by listing the items you're interested in and their current prices across different retailers. Update this dashboard weekly to track price changes and identify patterns. When you notice a significant drop or a Black Friday deal, you'll be ready to act quickly.
  • Develop a habit of reviewing your credit card policies every six months to stay informed about any changes or new benefits that could save you money. This could involve setting calendar reminders to sit down and read through the latest terms and conditions or benefits guide. By doing this, you might discover new cashback categories, insurance options, or promotional offers that align with your planned purchases.
  • Organize a monthly budgetin ...

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