With the current economic climate and uncertainty surrounding its overall well-being, inflation is still a prevalent issue in the US, as the current inflation rate is projected to remain at about 3.2% throughout 2024. Groceries are more expensive than ever, electricity bills are increasing, and gas remains at a premium. While we are losing purchasing power by allowing our money to sit in a 0% interest savings account or as cash, we can avoid this inevitability by various means. In this article, we will list several appreciating assets that you can invest in to protect yourself from the effects of inflation. These same assets will be profitable during times of target inflation levels, given that the Federal Reserve aims for about a 2% inflation rate annually. The assets will be listed in order from safest to riskiest, or highest potential yield.
Top Appreciating Assets to Protect Against Inflation:
High-Yield Savings Account
Savings accounts with relatively low returns and they are also usually insured. In the case where your money is stored in a 0% interest savings account or held as cash, this may be preferred if the money will remain put over the long term. Currently, many banks offer savings accounts within the 4-6% APY range, allowing you to earn money through lending over longer periods. Being that the inflation rate is about 3.2% at the time of this writing, a 4-6% APY protects your purchase power. However, these kinds of accounts tend to work on a conditional basis. Many of them have minimum deposits, fees, and other guidelines in order to regulate their lendable funds to others.
I Bonds/Series I Savings Bonds
I bonds are inflation-protected assets, given that their interest rate adjusts every 6 months according to inflation, and applied to this new principal. While the interest is earned monthly, interest is compounded semiannually, and allows the principal to grow during each of these periods. These are a good idea for growing your wealth over long periods of time, protecting against rising prices, and can be considered as safe investments since they are backed by the US government. Consider these for 5+ year investments, since you forfeit 3 months of interest if you cash out the bond before 5 years. They are also geared more towards small to moderate-sized investments since they generally have a $10,000 purchase limit per year. Visit www.treasurydirect.gov to learn more and purchase I bonds.
Gold
Considered to be one of the go-to investments in times of hardship or uncertainty, gold is labeled as an asset that is beneficial to hold throughout these moments. Although they are subject to market fluctuations in the shorter term, gold is an asset that does not typically receive positive demand shocks, does not lose value over time, and has high liquidity. Gold has a positive correlation with inflation, so it can be a good investment if you are looking to maintain your purchasing power for the long term.
Hybrid Security - Convertible Bonds
A hybrid security is a financial tool that utilizes the debt aspect of bonds to give a more secure form of income while offering increased earning potential through its equity component. These bonds typically offer a lower interest payment than traditional bonds, so the inflation rate, if high, may overtake this aspect of the investment. However, high inflation would likely lead to higher priced equity of a company, and offset the negative consequences of inflation on the bond. Due to the uncertainty of when interest rates will drop this year, the consistent payment component offered by the bond may allow you to protect yourself from adverse outcomes of a recession. The equity component is subject to market fluctuations, so it is important to keep an eye on the price of your bond.
Real Estate
Since real estate is a tangible asset, as the dollar loses its value, real estate retains its own value and can appreciate during a given period of high inflation. Demand for real estate is kept high due to the increased prices and low supply because of labor and supply chain deficiencies, so high rental prices are likely to be met. For that reason, real estate prices have a positive correlation with inflation. Throughout the US, rental prices have increased steadily over the last few years, according to Rentcafe. Depending on the market, cities experiencing an influx of population can be a sound investment opportunity in the case of high inflation and uncertainty with increases in demand. Larger cities in states like Texas, North Carolina, and Florida are experiencing increased demand, which reflects their increased prices.
With this in mind, it would be a good idea to invest in real estate to protect your purchasing power during times of inflation. Of course, you can purchase a property and collect rent from tenants in a traditional manner. But, if you do not have the available capital or time to purchase/develop an entire property for yourself, there are several options that allow you to invest in real estate but on a smaller scale. One major example is Real Estate Investment Trusts (REITs), which are financial institutions that own real estate with the intention of producing income. Their shares are tradable, like stocks, so this would likely act as an appreciating asset during times of high or increased inflation. There are other similar options like Real Estate Mutual Funds, Real Estate Limited Partnerships (RELPs), and online crowdfunding through websites like Fundrise. These are all methods of capitalizing off of real estate with little to no involvement in order to protect your purchasing power.
Energy
During periods of inflation, energy costs typically rise among the most of all prices in the consumer price index (CPI), with it accounting for about 9% of it in the US. Being that it is another tangible asset that has its own intrinsic value, energy holds its value during inflation. Energy is also something that is relatively inelastic in the short term, as people’s needs must be met on a daily basis. As humans become more technologically dependent, we will then become more energy dependent. We are currently far removed from being able to completely eliminate fossil fuels from consumption, as about 81% of the US’ energy consumption comes from these sources. Energy producers become much more important, as the demand for energy continuously increases as populations increase as well. The cost of these inputs during inflation rises, leading to increased profits as well.
With the fact that energy is an essential commodity today, investing in energy companies through stocks would be a rewarding method of protecting your purchasing power by hedging against inflation. Like real estate, energy can be invested in through stocks, bonds, mutual funds, and crowdfunding.
Cryptocurrency
Cryptocurrency is a relatively new asset class that is gaining more and more recognition every year. With the recent implementation of the cryptocurrency Bitcoin into an Exchange Traded Fund (ETF), it is an asset that is gaining respect and exposure. Given cryptocurrency’s volatile and “mysterious” nature, many investors stray away from it. However, given that it is rising in popularity and you equip yourself with a deeper understanding of pricing mechanisms, you can use well-timed purchases to protect your purchasing power. Cryptocurrency is largely unrelated to the overall market trends, inflation, and regulatory measures since they are on decentralized platforms. They are free of government interference and are generally available to anyone with a unique crypto wallet at any time, unlike the stock exchange. It can be as easy as downloading an app on the app store.
Within the realm of cryptocurrency, there are stablecoins which are usually tethered to other assets, including fiat currencies like the Dollar or Euro. These are intended to mirror the value of these currencies but on a blockchain. On the other side, there are coins like altcoins which derive their value from a wide variety of sources. Utility coins are considered better investment options considering that they are used on platforms like Ethereum to support businesses in their functionality by providing access to a service. There are thousands of options to choose from in this category, but each comes with its own unique risks and potential.