Investment Moves To Beat Inflation: TIPS, Inflation-Adjusted Funds, & Tangible Assets

Major economic indicators point toward the United States entering a period of inflation for the foreseeable future. The global supply chain is still in disarray following the global shutdown and its impact on manufacturing. Labor shortages linger as employees seek wage increases and better working conditions, and the demand for consumer products remains as high as ever before. Gas and oil prices remain high as well, which makes it more expensive for logistics companies to fulfill demand at lower prices.

Sustained inflation can create a challenge for investors looking to make the most of their assets, particularly if this inflationary period puts a damper on the stock market. Even if Wall Street remains stable (or even grows in value), there’s still the likelihood that any gains withdrawn from your portfolio will translate into cash that doesn’t go as far as it used to.

There are ways for investors to beat inflation however—even if they can’t avoid it entirely. Some investment types are better suited than others when it comes to hedging against inflation. We’ll cover a few of the top performers and how they might play a role in your portfolio when inflation is the talk of the town.

Why Beating Inflation is Such a Challenge

Inflation is vexing for investors. Some sectors get hit worse by inflation than others. In this case, construction, manufacturing goods, and consumer products are all under threat of higher prices. Other market sectors, such as healthcare and technology, have less to lose. That’s what makes inflation tricky: the more prices rise on consumer goods, as they are now, the harder it is for investments in related sectors to perform well.

There’s also a macroeconomic element to inflation’s potential damage. Your investing dollar simply doesn’t go as far as it did before its purchasing power decreased. Withdrawing from the market means converting your holdings into cash that isn’t worth as much as it might have been when you invested in terms of purchasing power. So although big returns may still put more money in your account, you’re not going to get as much bang for your buck when inflation occurs. If you own shares in a company that can’t reasonably pass along increased costs to consumers, you’re going to have a harder time beating inflation.

High-dividend paying stocks can get hit particularly hard by inflation, given that their returns are more volatile than other investment types. This means a stock-heavy portfolio with holdings in affected sectors can leave you with a portfolio that’s actually worth less than it might seem if they were to cash out on what they’ve invested.

Beating Inflation through Traditional Investments

There are measures you can take through traditional investments that can help you hedge against inflation, although their efficacy varies.

Treasury Inflation-Protected Securities (TIPS)

Certain bonds can help you weather inflation, although not all. Your best bet here is to seek out Treasury Inflation-Protected Securities (TIPS). These bonds come with an interest rate that increases to keep up with the Consumer Price Index. Their principal increases and decreases with inflation, rising up to a certain percentage if inflation is still a factor at maturity.

Bear in mind, though, that the interest rate payout will decrease from its highs if your bond matures after inflation subsides. In other words, you may not come away with more cash because of how the principal moves, depending on when your bond matures and the market rebalances.

Inflation-Adjusted Funds

Some asset management firms offer funds designed to help investors stave off inflation’s repercussions. These funds consist primarily of TIPS and other securities that offer a guaranteed return. That means these investments do have a chance at beating (or at least keeping up with) inflation, but consist of assets you could purchase on your own as well without paying manager fees.

Tangible Assets Become Clutch When Inflation is On the Rise

Inflation is a tricky phenomenon for both investors as well as central banks. You’d be forgiven if you’re not sure exactly how to adjust your portfolio in order to hedge against it. And, for the most part, there’s only so much you can do. Withdrawing entirely from a sector of the market, or from stocks entirely, is a bad idea. Inflation is almost always a phase, which means the economy will eventually even out. Withdrawing from the stock market, or select holdings within the stock market, could rob you of compounding interest. Doing so can also make it prohibitively expensive to re-enter once inflation jitters subside.

Instead, consider tangible assets. Tangible, or real assets, are those that you can touch physically. Think of gold or other precious metals, commodities, real estate, or even rare and collectible items. Each of these tangible assets retain worth well—even when cash and equities do not. That’s because their value isn’t pegged to the value of the dollar as directly as other investments. Instead, their own valuation and appreciation set their value, which means they’re usually a more steady option than shares.

Alternative Assets: A Popular Tangible Asset Class

Alternative assets are a great inclusion into any portfolio, whether inflation is on the rise or not. Tangible assets within the world of alternatives are even better, though, as they give you access to a part of the market that’s not easily swayed by the market. Even better, most aren’t traded on the markets in the first place.

When you invest in alternative assets, you’re broadening your portfolio beyond the kinds of investments that suffer the worst from inflation. They’re not tied as closely (or at all) to the markets; instead, they mostly rely primarily on their own demand and valuation. Take corn futures as an example: corn is a tangible asset, even if you don’t touch it as an investor. The price of corn relies on its supply and demand—the less corn there is, or the higher corn prices are in a recession, the more your investment is worth.

Other alternatives, such as precious metals, can also help hedge against inflation. This is due primarily to their built-in demand as essential components of electronics and everyday life. Gold, for example, has long served as a haven for inflation-wary investors. That’s one of the reasons gold has remained as expensive as it is, which means you might not get much of a return if you’re investing in gold for the first time.

Data Source: macrotrends

Gold prices do rise, but may do so slowly or with significant volatility along the way when financial panic strikes. Plus, the opportunity for a major return has likely passed already, given the relative price increase in gold during the past three decades.

Why Not all Alternatives Can Beat Inflation Equally

Both corn and gold are two commodities that, despite not being traded on Wall Street, are still traded on different exchanges. That means prices can (and do) fluctuate, and that the price you paid today will stay the same tomorrow. That’s where other kinds of alternative investments may play a more suitable role in your portfolio. Alternatives that are tied into stable, long-term investments can withstand inflation and market volatility given how removed they are by these and other market forces.

Farmland investing, for example, has withstood inflation as well as economic recessions. Unlike gold, however, farmland doesn’t come with a hefty price tag for investors—especially when you incorporate farmland into your portfolio with fractional ownership. FarmTogether provides investors with the opportunity to buy shares of farmland which, unlike in the past, makes it easier for your average accredited investor to incorporate this holding into their portfolio mix.

Data Source: macrotrends, USDA ERS

Farmland value has, on average, increased since the 1990s with less volatility than gold. You also get more for your money with farmland, given that a single ounce of gold costs thousands of dollars at present.

There are, of course, a number of other alternative investments that can help you beat inflation. Commercial and residential real estate can help you park your earnings into tangible assets with a good chance of appreciation over time. Others, such as Bitcoin, are far more volatile than conventional alternatives, even if cryptocurrency is becoming a sought-after investment during periods of stock market volatility. All of these alternatives come with their own advantages and disadvantages, so be sure to do your research and invest based on your own comfort level and portfolio strategy.

Why Farmland Investing Could Be an Effective Inflation Hedge

Inflation's impact is becoming increasingly apparent, and it may continue to affect various sectors of the economy. Currently, inflation seems to be driven by supply chain disruptions and the scarcity of goods, which may result in a short but challenging inflationary period. However, if fiscal policies and ongoing supply chain challenges create a prolonged period of inflation, investors may need to consider more resilient strategies to navigate the situation. Farmland investing could offer a potential hedge against inflation under these circumstances.