Traders and investors worried by inflation often ask a very pertinent question: how to profit from inflation? The surge of inflation rightly has investors concerned. Ideas are always there, yet they don’t know what they should do to cope with inflation.
When inflation surges, the first thing is to keep tabs on emotions because the term inflation often proves overwhelming for many. However, panic and worries aren’t the right responses. Conversely, being patient and disciplined as well as having ideas is the right approach.
Are you an investor and looking to know how to profit from inflation when it surges? Then you are at the platform you exactly needed to be. Because in today’s post, we are going to highlight how to profit from inflation. However, our guide isn’t investment advice. Investors should conduct all the research and evaluate our ideas before adopting them.
What is inflation?
We hear a great deal about inflation but what is inflation really? For example, why do you find a hotel room comparatively more expensive for an upcoming vacation than the last year? Or why does your grocery bill goes up despite buying the same amount of items? It is inflation. So, inflation means, in the simplest of terms, the rise in prices of goods and services. It doesn’t happen because goods or services are getting better. Rather it happens because your money is getting worse.
In other words, inflation, in fact, is a measure of an increase in prices over time. It also tracks how the value of money falls because of increased prices. So, inflation isn’t a phenomenon that can easily be understood. However, it isn’t a new phenomenon either as it has been around forever. And, it will be around forever. So, what should be your plan of action when inflation surges? How to profit from inflation? Let’s dive deep into the topic and know how to take profit from inflation.
How to take profit from inflation when it surges?
Surely, inflation is a term that seriously affects all – masses, professionals, businesspersons, investors, and so on. However, there are some measures that can protect you from surging inflation. Of course, one way is to strictly stick with your portfolio. Moreover, it is also crucial to stay calm as inflation doesn’t last for long as history suggests. What you have to do is tweak your portfolio and include things that perform well during inflation. So, what are those things? And, how to take profit from inflation using those things? Let’s see.
1. Value stocks
Historically, it is a proven fact that value stocks perform better during inflationary periods. Value stocks are stocks of companies that trade at below-average prices in the stock markets. So, what is the logic here? Why do value stocks perform well when inflation surges? That’s because these companies belong to industries that get hit less by inflation. For example, value stocks of companies in the foods and beverages industry or in financial sectors such as banks do better during inflationary conditions. These companies have more pricing power. They can easily increase their prices better than companies in other industries when inflation escalates.
Additionally, the demand for products or services offered by these companies never wanes. These companies are also well-established. So, you don’t have to be concerned about their expected growth declining over time. In short, value stocks are one of the best options to profit from inflation.
2. Treasury Inflation-Protected Securities
Treasury Inflation-Protected Securities (TIPS) are another great option for investors to profit from inflation. These are government bonds that help you cope well with inflation. Although TIPS also accompany multiple risks just like risks associated with other fixed-income investments. However, the biggest advantage of these securities is that an adjusted principal amount is added if inflation surges. In the simplest of terms, TIPS offers more interest rates when inflation increases. On the other hand, if inflation falls, so do the interest rates.
Thus, Treasury Inflation-Protected Securities or TIPS help you to balance your portfolio as they are adjusted to the rate of inflation. Additionally, the backing by the US Federal Government also makes them the safest investment.
3. Real estate
Another great option for profiting from inflation is real estate. History indicates that the real estate industry also performs better even if inflation surges. The reason is that the property owners and landlords see the value of their properties rising. Additionally, they can also charge higher rents as inflation continues to rise.
4. Short-term bonds
Short-term bonds are also a great option for people wanting to know how to profit from inflation. These bonds are more resilient to inflation as they resist higher interest rates when inflation surges. Conversely, long-term bonds suffer losses as inflation rises. So, it is a wise decision to go for short-term to intermediate-term bonds to cope with increasing inflation. Additionally, holding short-term bonds means you are holding cash. Thus, your capital also remains safe as well as easily accessible.
Gold is one of the favorites of inflation hedges. You can protect your capital from inflation by investing in gold. In fact, the gurus of economics and investing see gold as portfolio insurance. We aren’t talking about gold trading here. Rather we are talking about investing in gold as a strategic measure. It is the smartest way to protect your hard-earned money from devaluing. There are many financial advisers who suggest gold allocation to the portfolios.
6. Other commodities
Intelligent investors want gold in their portfolios, but they also want other commodities such as metals. They invest in both hard commodities and soft commodities to benefit from inflation.
Hard commodities like iron and copper always have high demands as they are used in several industries. Such metals are always pricier. On the other hand, other commodities like oil and gas are a good hedge against inflation. Besides, commodities like agricultural products are also there. Prices for all those commodities never witness downfalls. Rather, their prices continue to increase as inflation increases. Thus, commodities, including hard and soft, effectively protect your capital from inflation.
Is it a good idea to invest when inflation surges?
There are always two sides to a coin. Thus, where there are advantages, there are also disadvantages. Therefore, it is always the right approach to consider both sides of the coin before investing during inflationary times. Moreover, it is also absolutely imperative to stick to your investment plan if any. Investing wisely is the key.
As for the advantages of investing during inflation are concerned, the first and foremost benefit is to preserve your portfolio. You can actually maintain your buying power by preserving your portfolio. Secondly, it also helps you keep your portfolio growing even in the most difficult conditions. Thirdly, you can also diversify your portfolio and spread risks across multiple asset classes.
On the other hand, the main drawback of investing during inflationary times is exposure to greater risks. Secondly, inflation also causes diversion from your longer-term plans. You have to swerve from what you want to achieve and steer to short-term goals. Thirdly, limited options for investing also lead you to an oversized portfolio in some asset classes.
How to profit from inflation – the wrap-up
“How to profit from inflation” is a very pertinent question that investors often ask. Inflation rightly has investors concerned. However, the good thing is that investors have multiple options to profit from inflation. These options significantly protect them against inflation. Thus, focusing on less traditional investment strategies may substantially enhance returns during inflationary times.