With an extended period of low interest rates, the declining value of the dollar, and unprecedented government spending, the economy and the markets are set up for a high level of inflation in the coming years. The big question for investors is how they will handle it.
Investing in a high inflation environment takes a different mind set. So, put on your thinking caps and read on.
Here are three asset classes that are poised to do well in the future and help save you from the jaws of inflation.
Commodities. Commodities make up the things we use every day. They range from agricultural products such as wheat and corn, to metals like gold, platinum, and silver, to petroleum products like oil. They also include financial instruments, foreign currencies, and even stock indices.
Commodity prices typically rise when inflation is increasing, so they offer protection against the effects of inflation. As the demand for goods and services increases, the price for those goods and services increases along with the price of the commodities used to produce them.
Commodities can be purchased in a number of different ways, but the most common way is to buy commodity mutual funds and commodity exchange-traded funds (ETFs).
Treasury Inflation-Protected Securities (TIPS). The principal on this class of bonds is adjusted as inflation rises. So instead of losing value, they keep pace with the pressures of inflation.
TIPS can be purchased through a mutual fund, ETF, or directly from the government.
Real estate. The real estate market has been in the doldrums for several years. However, it may be improving. You may be saying to yourself, "I just lost a boatload in my real estate holdings." Think of the real estate market of the '90s and 2000s as a period when real estate became significantly and abnormally overpriced. Then think of the last few years as a time for re-pricing to levels that reflect true value. Now real estate is again heading towards its positive cycle.
As an asset class, real estate provides non-correlation, which means that it does not move in lock step with the mainstream markets. That provides diversification for your portfolio, and for today's investors, that's important.
Real estate is also a hard asset. You can feel it, see it, and touch it, and that provides comfort to many investors.
Real estate can be purchased in several ways, one of which many investor have already used—residential real estate. Owning your home serves as an inflation hedge because it gives you the opportunity to live there without incurring increasing rent expenses. Even if you have a mortgage, as long as you have financed or refinanced at a low rate—and rates are exceptionally low)—for a fixed period of time like 15 or 30 years, you are keeping your costs locked in, even as other costs increase. In other words, your mortgage payment today will be the same in 15 years and will likely be paid off in 30. Now that's fighting inflation.
Real estate investment trusts (REITs) are another way to invest in real estate. Many commercial REITs have been experiencing difficulties with debt refinancing and valuations. While this looks like a poor investment, it could be one of the best from a timing standpoint. When investing in real estate it is important to ensure that you aren't over-leveraged. If you do buy into a REIT, make sure the investment company has not overextended itself. That could come back to bite them (and you) in the future.
While inflation hasn't reared its ugly head yet, it probably will in the not-too-distant future. Make sure you have a plan to fight it.
Good luck and happy investing.
Kelly Campbell, Certified Financial Planner and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, a Registered Investment Advisor in Fairfax, Va. Campbell is also the author of Fire Your Broker, a controversial look at the broker industry written as an empathetic response to the trials and tribulations many investors have faced as the stock market cratered and their advisers abandoned their responsibilities to help them weather the storm.