Inflation comes and goes and it is generally described as an increase in prices or various goods and services. The purchasing power of money is reduced during inflation, in the sense that the same unit buys fewer goods and services. While inflation can make your monthly budget go haywire, it can also erode the value of your investments.
It is apparent that the rate of return on your investment should be higher than the inflation rate. As inflation can never be entirely eliminated, it is important to secure your investments from inflationary trends. Here is a look at some investment options that are highly resistant to inflation and can boost your profits in most situations.
Gold – Since long, gold is one of the most effective investment options to beat inflation. Be it war or famine or other factors, gold has always helped people survive. Data also supports the importance of gold, wherein the yellow metal has registered an impressive average annual gain of close to 9.5% over the last two decades. If we account for average inflation of 2.4 percent during the same period, investors have essentially earned a healthy 7% on their investments in gold.
But before you put your money in gold, understand that investing in gold-focused exchange-traded funds (ETFs) and mutual funds works out better. If you invest in physical gold, it will involve additional costs such as insurance, storage, etc. Also keep in mind that gold will be best for long-term investment. Over the short-term, gold prices fluctuate wildly.
Diversified stocks – If you choose a diversified portfolio of stocks, you can easily beat inflation and make money. Over the past decade, average annualized returns from the S&P 500 has been around 11%. After factoring in the average inflation rate in the past decade, the net returns on investment works out at more than 8%. You can choose from S&P 500 index fund or S&P 500 ETF. This way, you do not have to do extensive research in picking individual stocks. Here too, you need to keep invested over the long term.
REITs – Real estate can be a good hedge against inflation. However, considering the high upfront cost involved and long lock-in period, investing in real estate may not be possible for every investor. The solution is real estate investment trusts (REITs), which can help regular investors to include real estate investment in their portfolio. REITs are essentially similar to a fund that focuses exclusively on real estate assets. Another benefit of REITs is that you will be getting regular dividend payouts. Over the last decade, REITs have generated average annual returns of around 10%.
Treasury Inflation-Protected Securities (TIPS) – These are designed in a way that automatically adjusts for inflationary factors. You will be getting regular interest payments, along with any appreciation derived from inflation adjustments. It is to note that TIPS are not necessarily a growth-oriented investment avenue. What it can do is guarantee the purchasing power of your money. Over the last decade, TIPS have averaged returns of 3% annually.
I Bonds – Also known as Series I savings bonds, I Bonds are govt-issued security, especially designed to beat inflation. They are similar to TIPS, but do not adjust the par value of your bond. I Bonds work by adjusting the interest rate every six months, which helps beat inflation. Lock-in period of one year and low-growth potential like TIPS are some of the drawbacks of I Bonds.