Fighting Inflation by Investing in These Three Asset Classes
From bullions to bonds, investing gets harder when inflation hits. But these three inflation-resistant asset classes make it look easy.
Updated Oct 14, 2022
Many companies on MoneyMade advertise with us. Opinions are our own, but compensation and in-depth research determine where and how companies may appear.
It seems that we've reached the eye of the inflation storm. The Fed repeatedly raising interest rates in response to the Consumer Price Index (CPI) going off the charts is certainly hurting most investors. However disconcerting, high inflation was inevitable following global uncertainty in recent years—and investors must be prepared.
Adjusting your portfolio in response to high inflation is key to outperforming the S&P 500, but interest rate hikes or drops are also critical factors to consider.
There have been many philosophies for how to combat high inflation, rising prices, and stock market slumps. A conservative investor will preach a bond or mutual fund, while a disillusioned investor would tell you to put everything into crypto. But in reality, beating inflation isn't so black or white. Here's how to invest during high inflation without sacrificing long-term profitability.
See inside MoneyMade’s 6-figure multi-asset portfolio
Inflation is when there's too much money chasing too few goods. This could be interpreted as the value of money deteriorating and consumer prices rising, but it can also be seen as goods becoming worth more money. Because inflation makes money less scarce, investors become more inclined to hold alternative assets that better preserve their wealth.
Why inflation hurts stocks
Stocks are good investments in times of economic growth, but they don't do well when facing inflation. When inflation rises, central banks react by raising interest rates, which makes it more expensive for banks and companies to borrow money. The result is stunting the growth of public companies, bringing stock prices down, and ultimately hurting you as a shareholder.
Not even pre-IPO companies are immune to economic stress since it can ultimately bring down their valuations. That's why investors hedge against those risks with asset classes like commodities, real estate, and even fine liquors. That last one may surprise you, but the scarcer the assets, the better they are at preserving value and the more likely they are to stay stable when interest rates increase and purchasing power declines.
Hedging inflation with bonds
The traditional wisdom for fighting inflation is to hold bonds, but this method of preserving purchasing power is out of vogue. Treasury bonds were long considered the safest investment one could make, but even economist Ray Dalio said they're "stupid to own." And don't just take his word for it—the recent inversion of the bond yield curve is a familiar presage of a recession.
Most importantly, bonds are highly impacted by rising inflation, second only to cash. Bond ETFs can be good for short-term speculation and hedging against riskier investments, but they don't offer great inflation protection. A better investment option for fighting inflation is treasury inflation-protected securities (TIPS) or bonds with a principal amount that adjusts to inflation.
Treasury inflation-protected securities are probably the safest inflation hedge, but you won't profit from inflation if you're just shopping public markets. Let's look at the best assets for dunking on high inflation like Michael Jordan.
Best investments for inflation
Best investments for inflation
Commodity prices rise when inflation rises, making them a quintessential part of a resilient investment portfolio. The problem with commodities like grain and oil is that they're volatile and riskier to invest in than gold and other precious metals. However, food and energy commodities do fall into the category of essentials along with farmland, fertilizer, and other crucial materials—essentials are inherently high-demand commodities.
When it comes to investing in an inflation hedge, gold is a classic choice. This precious metal has a long history as both a luxury commodity and a store of value. The price of gold has been extremely stable during both good and bad times in the economy, and gold investments are easier to access than ever before. It's definitely the gold standard of inflation hedges, pun intended.
Gold is a crucial part of an investment portfolio because it's one of the least volatile assets. While hard to produce and expensive to store and transport, gold benefits investors by being scarcer and more secure since large quantities are difficult to steal. Gold investors do have to deal with some overhead, but this cost is nothing compared to letting the Consumer Price Index gnaw at your purchasing power.
Buying a gold ETF is a way to quickly gain exposure to gold in response to rising inflation. Gold stocks are easy to buy and sell on platforms like Public, but the problem is that holding stocks has extraneous costs that regular gold doesn't. Though this is the cost of doing business, some investors prefer more direct exposure to gold than an exchange-traded derivative.
If that's the case, then a gold investment platform like Hard Assets Alliance may suit you better. Hard Assets Alliance lets you invest in gold bullions directly on their 24/7 exchange. You can use their platform to invest with a retirement account and even request to have your precious metals shipped to you. Platforms like HAA make it easier than ever to invest in gold and silver, but they don't offer access to other precious metals like platinum or palladium.
Hard Assets Alliance
HAA is a great way to customize your gold investments with low fees, but other platforms require a lower minimum to start investing. For instance, Vaulted is a gold investing platform that gives you direct exposure to gold bullions with no investment minimum but charges higher fees. Gold is one of the best inflation hedges to invest in and investing platforms have made the asset class more accessible than ever.
Fine wine and luxury spirits
One eccentric asset class that makes for a great inflation hedge is fine wine. In our wine study, we found that luxury wines are the best performing asset of the past year compared to gold, stocks, bonds, and bitcoin. We even put fine wine to the test and found that an investment portfolio with exposure to it would have performed better over the past five years compared to the ones without it.
Fine wine is a luxury asset that retains its value by being extremely scarce, sought after, and collectible. Fine wine has performed extraordinarily well in recent years compared to the stock market, and its long-term performance is just as sweet. The best wine investments can expect low volatility and minimal drawdown, making it one of the best inflation protection asset classes. But figuring out how to begin investing in wine properly is the biggest obstacle.
Fine Wine & Diamonds
How are you fighting inflation?
Another problem is that storing your wine investments can be costly. Maintaining the right temperature and humidity is crucial for preserving wine bottles and ensuring they stay valuable. Storage comes easier when investing in luxury whiskey compared to fine wine, but the overhead can be a headache whether you're a beginner or a sommelier. This is where investment platforms like Vinovest can help.
Vinovest is the best way to invest directly in wine without the hassle of dealing with it physically. Vinovests experts guide investors to ensure that you make wine investments that fit your goals and help you sell them for a decent profit when the time is right. If you're a hands-on investor looking to break into California wines, consider signing up for Vinovest.
It's the easiest way to own investment wines that the pros are buying, but some might find Vint to be more convenient.
Vint is the most accessible way to invest in fine wines, although they don't let you invest in entire bottles as Vinovest does. Investors can use the Vint platform to purchase shares in Vint's collections of fine wines and top luxury whiskeys starting at $50. We found that portfolios containing whiskey performed better when markets crashed and inflation spiked than those that didn't.
With Vint, you hold onto shares indefinitely until they sell the collection and give you a cut of the profits minus a fee. Vint is a great platform for making smaller investments in diverse collections of fine wines and spirits, no wine knowledge required.
How can we talk about safe investments without bringing up real estate? Homeownership is ingrained in our psyche as part of the American dream, but being a landlord isn't as glamorous as it sounds. Owning rental properties is a full-time job because somebody must be able to managerially juggle maintenance, tenants, property taxes, and a host of other tasks. So while real estate can be profitable, it's far from a passive income machine.
Nevertheless, real estate is an excellent investment in terms of a store of value. Firstly, land is a scarce asset because it's finite, but this doesn't mean it's all the same. The value of properties in a highly sought-after location like San Francisco will go up faster than ones in the middle of Texas. But that doesn't mean a huge plot of land in the middle of Texas isn't as good of an investment as a $1 million Penthouse in Russian Hill.
If you want to invest in real estate but don't know what kind, then you can always find real estate investment trusts (REIT) that match your needs. REITs (and eREITs) are like mutual funds that you can invest in to gain exposure to commercial and residential real estate. For instance, farmland REITs make it easy to invest in productive agricultural real estate. REITs usually offer competitive returns and greater diversity than direct property investments.
Farmland offers the best of both the real estate and agricultural commodities asset classes, almost as if it was designed to fight inflation. If you're looking for an easy way to invest in farmland, then you should know about FarmTogether. FarmTogether enables accredited investors to earn passive income from productive farmland while also enjoying the appreciation of land value.
Farmland isn't for everyone, but commercial real estate investments have lots of the same benefits. Tenants of commercial buildings are mostly businesses that lease them for a period of several years to a decade. Commercial real estate owners deal with less fuss than residential landlords and have fewer liabilities, but the downside is that commercial properties are less essential and could be hurt more by inflation, rising interest rates, or general market downturns—though this is less true for farmland focused on food agriculture.
Residential property owners deal with their fair share of problems, too. For instance, many couldn't collect rent for several years due to emergency measures during the pandemic, which cut investors off from their steady income stream. Aside from that extraneous factor, residential real estate is a great inflation investment because rent isn't a fixed cost and may increase in response to broad economic factors.
If you don't have what it takes to be a tough landlord, then try using HoneyBricks to invest in real estate. HoneyBricks is a tokenized real estate platform that lets accredited investors buy commercial or residential real estate using crypto. That means you can use HoneyBricks if you need a convenient way to offload your blockchain assets into more stable investments. HoneyBricks is an easy way to gain exposure to a high-growth, income-bearing asset class, even if you're not into crypto.
Diversity is your friend when investing in an inflationary environment, so it's better to have an investment strategy that incorporates multiple asset classes rather than just one. Adjusting your portfolio in response to high inflation is the key to outperforming the S&P 500 index fund, but interest rate hikes or drops are also critical factors to consider. With enough exposure to assets like luxury spirits, real estate, and precious metals, your portfolio is sure to beat inflation.