The economic outlook has been clouded with uncertainty for the past three years at least, with no clear direction and little sign of stabilization regarding the global inflation rate. As such, it is important for investors to carefully consider their investment choices.
Inflation can have a dramatic effect on returns, with some assets providing substantial returns and others diminishing in value as prices rise. While many investment options should be considered during turbulent times, the best assets to own during inflation tend to be commodities, real estate, as well as stocks and bonds.
What is inflation?
Inflation is an economic phenomenon that occurs when prices for goods and services increase over time. It is usually measured by the Consumer Price Index (CPI), which tracks changes in the price of a basket of consumer goods and services from one period to another.
When there is inflation, it means that money has less purchasing power. This can lead to rising costs for businesses, consumers, and investors alike, as they all have to pay more for the same items or services than before.
In extreme cases, unchecked inflation can cause significant damage to an economy as it erodes away people’s savings and their ability to purchase basic necessities. But for smart investors, inflation can cause a unique opportunity to profit.
What assets do well during inflation?
If you’re wondering how to profit from inflation, the first thing to consider is which types of assets typically perform well during periods of inflation. Based on previous trends, here are the top-performing assets to strongly consider when planning for inflation.
Commodities are one of the best assets for inflation, as they tend to increase in value when prices rise, and have a long-term track record of outperforming other asset classes over time — making them an even more attractive option for those seeking to capitalize over periods of inflation. This is because commodities are usually priced based on their scarcity and demand, meaning that as prices go up, so does the value of the commodity.
Furthermore, commodities can provide a hedge against inflationary pressures, because their values often move opposite to general price levels. This makes them an attractive option for investors looking to protect their portfolios from the effects of rising prices, as well as those looking to profit.
Investors may also choose to purchase stocks of companies that produce these commodities, such as mining companies and other producers of raw materials.
Real estate is another way to profit during inflation, particularly investments in rental properties and commercial real estate. While real estate is often considered a commodity, it deserves its own classification due to the incredible potential of this asset class.
Although house prices may be affected by increases in interest rates, property can retain its value even amidst a recession or other economic downturns. The reason why real estate performs well during inflationary times is because rent tends to rise along with general price levels, meaning that property owners can experience significant income increases without having to sell their properties at a loss when markets become volatile.
Furthermore, if you buy real estate properties in areas where there is potential for growth (i.e high levels of neighborhood development) then your investment could yield even greater returns over time as those areas become more desirable places to live and work. Not to mention the fact that the capital gains tax in Texas does not exist, so when you do decide to sell, you can keep more of the money you make.
Stocks and bonds
In times of economic downturn, investors often look for safe investments for retirement that can help to protect their capital and provide steady returns. Stocks and bonds are two types of investments that have long been considered the best investments during inflation and a recession.
While stocks come with more risk than other asset classes, they also have the potential to deliver higher returns over time. Bonds, on the other hand, are typically seen as a safer investment choice during an economic slump because they offer fixed-income payments and tend to be less volatile than stocks.
Inflation can also have a positive effect on stocks and bonds. This is because when the cost of living rises, companies need to raise their prices in order to remain profitable, and this can lead to increased share prices as well as higher rates of return on bonds.
Continue reading: How does inflation affect stocks and bonds?
Which investments are most negatively affected by inflation?
Understanding how different types of investments perform in various market conditions is key for anyone looking for profitable strategies during periods of inflation. The best assets to own during inflation can often be the worst investments during inflation too.
Generally speaking, cash investments like savings accounts and CDs are among the worst investments during inflation because they tend to lose value over time as prices rise.
Other assets such as stocks and bonds may be affected by increases in interest rates, but they often fail to keep up with general price levels, making them better suited to long-term investments, rather than short-term trades, paying off when prices have returned to a more normal level.
Ultimately, if you’re looking to profit from inflation, it’s important to partner with a financial advisor who can recommend the best managed investment accounts and strategies for your unique financial landscape.
Plan to protect your wealth during uncertain times with Avidian Wealth Solutions
Inflation is an economic phenomenon that can have a significant impact on the value of your investments. When inflation rises, it reduces the purchasing power of money and affects both businesses and consumers. As such, it’s important to know which are the best assets to own during inflation in order to protect your financial future.
If you’re looking for a professional, experienced financial team to guide you through the ups and downs of any economic environment, look no further than Avidian Wealth Solutions. We are a Texas-based high-net-worth investment firm offering clients personalized solutions to help them protect and grow their wealth during periods of inflation and beyond.
To learn more about our wealth management services, schedule a consultation with us today.
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