How To Invest To Beat Inflation

The central theses

• Inflation rose by 0.4% in September, so high prices are likely to persist for some time.
• There are a surprising number of investments that can be used to hedge against the effects of inflation
• Some, like Gold, have been around for thousands of years and others, like TIPS, are more modern and sophisticated

With the latest numbers from yesterday, it’s clear that inflation isn’t going away anytime soon. The September announcement saw prices rise 0.4%, bringing the annual inflation rate just a tad lower to 8.2%.

In the context of a target inflation range of 2-3%, the current rate is still breathtakingly high. As the Fed is determined to bring it down by raising rates, it is likely to continue to come down to earth slowly.

The problem is that this may take a while, and investors have yet to earn returns in the meantime. Fortunately, there are a number of different assets that are holding up well to inflation.

Some of these are fairly recent innovations, and some of them date back to the days when people used horses to get around and didn’t have flush toilets.

We give you an overview of these investments, their pros and cons and how you can structure your portfolio to weather the effects of inflation.

Download Q.ai today for access to AI-supported investment strategies. If you deposit $100, we’ll add another $100 to your account.

What does inflation do to investments?

In fact, a bit of inflation is often seen as a good thing for the economy as a whole. Moderately rising prices encourage people to go out and earn more and invest their money, and encourage companies to innovate and improve their businesses.

Because when your wealth or income stands still, it slowly declines in real terms over time as prices rise around you.

However, when inflation gets too high, it puts pressure on household budgets and can reduce spending on certain things. The last year or two has been a perfect example of that. Because the prices of basic necessities like gas, energy and groceries have risen so much, many households have had to save on discretionary spending like electronics, entertainment and vacations.

With less spending in the economy, companies generate less revenue, which in turn means they hire fewer employees or even lay them off. This creates a negative spiral that slows down economic growth and is one of the reasons for the stock market crash this year.

Which investments perform well when inflation is high?

There are a number of investments that can counteract this trend when inflation is high. Now that’s not to say that all of this will always outpace inflation. Different market cycles can cause volatility for different reasons, so as always, the key is to diversify across the different assets available rather than go all-in on one or two.

Nor will they necessarily grow quickly when inflation is high. In many cases, these assets are designed to simply hold their value rather than drop dramatically. For example, if the S&P 500 is down -25%, a return of -1% or +0.25% from another asset would be considered a very good result, even if it’s still below your long-term target return.

Inflation Linked Government Bonds (TIPS)

US Treasuries are essentially loans to the US government. If you see on the news that they’re borrowing $100 million for an infrastructure program or military spending, Joe Biden doesn’t go to the local Wells Fargo branch and fill out some loan paperwork.

To raise the funds, they issue government bonds. Investors such as mutual funds, pension funds, and individuals can then buy these, which offer them a set rate of return over a period of time, at the end of which they get their money back.

So right now, a 20-year Treasury note is paying a yield of 3.375%. That means investors who buy $10,000 will earn a 3.375% return each year and get their $10,000 back after 20 years.

Now investors are no longer tied up for 20 years, they can sell the bond to another investor, but the bond itself will continue for the entire period.

The problem is that regular government bonds do not take inflation into account. With inflation at 8.2% and a 20-year bond paying 3.375%, the real yield after inflation is actually -4.825%. Not much for investors.

TIPS, on the other hand, pay a set margin above the rate of inflation. The margin varies, but is never less than 0.125%. That rate may look a lot lower than standard bonds, but it can really pay off when inflation is high.

As a hypothetical example, with inflation at 8.2% and a TIPS with a margin of 0.125%, the bond would pay interest at 8.325%. That’s better than almost any other investment out there, especially considering it’s 100% backed by US government security.

It’s important to remember that when inflation is low, they can also go the other way. If the inflation rate falls to 1%, the same bond only pays 1.125% interest.

TIPS form a large part of our Inflation Protection Kit, an investment kit we have developed to protect investors from record price increases.

In addition to TIPS, this kit also includes a number of other miscellaneous assets that have traditionally proven to be successful hedges against inflation. Let’s cover some of them.

gold

One of the oldest assets in the world, gold still retains its position as a hedge against inflation in today’s modern economy. The history of gold as a store of value dates back to ancient civilizations such as the Incas and the Egyptians. Even then, people realized that the scarcity and beauty made it a perfect commodity for trade and wealth.

The world may have evolved since then, but gold still makes up a large part of the global economy. Countries still rely heavily on their physical gold reserves as collateral for their own global financial operations.

The US government still holds the world’s largest gold reserves, with over 8,000 tons of physical gold stored in places like Fort Knox.

There are several ways for investors to buy gold as part of a wealth preservation plan. You can buy physical coins and gold bars. This leads to a number of problems, e.g. B. in storage and insurance.

Companies will store it for you, but that can get expensive. You can store it yourself, but you’ll need proper security, and many home insurance policies won’t cover gold. It’s not an easy process.

There are also financial products that can help. There are funds and ETFs that invest in gold, either by holding physical gold on your behalf or by investing in financial instruments such as gold futures.

other precious metals

While gold is the most common precious metal for inflation hedging, there are many others that are also considered investment grade. The most popular of these are silver, platinum and palladium.

All of these metals have long been used in jewelry, industrial applications and as stores of value. You can think of these as small-cap metals versus gold’s large-cap metals. The price is often more volatile, but they can go through phases where they increase in price significantly.

The problems for investors are the same as with gold. Holding physical funds presents insurance and security challenges, or requires the trust and expense of a third party bail. Again, as with gold, there are mutual funds and ETFs that can provide exposure without having to install a fireproof safe in your home.

At Q.ai we have created an investment kit that does all the work for you. The Precious Metals Kit invests in gold, silver, platinum and palladium ETFs and uses AI to predict which of these metals is likely to perform best over the coming week.

Once these predictions are made, our AI automatically rebalances the portfolio according to the allocation expected to deliver the best possible risk-adjusted return.

raw materials

Last on our list and another addition to our Inflation Kit are commodities. These are resources used around the world with a demand profile that does not change much due to market conditions.

Agricultural commodities such as wheat, wool and soybeans are some examples. Since we depend on these types of goods to meet our basic needs, the demand for them tends to remain fairly stable.

While we can all cut down on vacations or sneakers, we’re less likely to reduce our consumption of things like bread and vegetables.

This means that commodity prices fluctuate widely based on the underlying rate of inflation, and there is a wide range of financial products such as futures and options that are based on commodity prices.

Another important commodity is oil, which in turn is used in our economy in a way that is not affected by inflation. While we grumble about the price of gas, we still have to fill up our cars and trucks to get to work.

In our Inflation Kit, we use commodity-based ETFs to gain exposure to these assets, and we use sophisticated machine learning AI to allocate them the correct amount each week.

Download Q.ai today for access to AI-supported investment strategies. If you deposit $100, we’ll add another $100 to your account.