January 28, 2023

What Investments Beat Inflation?

By DENNIS BLACK on Jan 15, 2023

When you think about investment, you probably think about a stock or bond. These are investments that you can buy and then you can watch the value increase over time. This can be a great way to invest, but you must be careful to avoid overly risky investments. There are also other kinds of investments that can be very risky, including commodities, real estate, and high-yield bonds.


Stocks have been beating inflation for seven decades and counting. However, there are several variables to consider when deciding how to invest in stocks. For instance, which companies have the most pricing power? Or which ones will be hit the hardest by higher rates of consumer inflation.

One of the best things about investing in stocks is that they tend to provide a decent hedge against rising prices. In fact, over the long term, stocks have outperformed bonds and gold.

Although the chart above may give you the jitters, there are several factors to consider when deciding how to invest in stocks. Ultimately, the most important factor is your own personal investment strategy. A portfolio comprised of a well-diversified mix of low-cost stocks can be an excellent choice for long-term investors.

If you are considering buying individual stocks, make sure to do your research. While there are numerous factors to take into consideration, there are certain key components to look for. The best way to determine which stocks will be the most advantageous for you is to examine each company's unique characteristics. Ideally, you want to buy growth stocks that outperform the market. They are less likely to be hit by high inflation than the average company.

Another benefit of owning stocks is the ability to raise prices as a company's costs go up in the real economy. This can lead to a better profit margin. But it can also erode the value of a portfolio. Regardless of the reason for investing in stocks, you should keep in mind the stock market has lost trillions of dollars in market capitalization over the years. As such, a prudent investor should be cautious about adding to a portfolio.

The chart shows how the S&P 500 has performed over time. It shows that stocks have outperformed inflation in every 20-year period since 1953. Obviously, it hasn't always been that way. It's not a great idea to believe that investing in stocks will always be a good way to protect against inflation. Rather, you will need to do your homework and be willing to wait for the right time to buy.


Commodities are a good inflation hedge. This is because commodities tend to perform well when consumer prices are high. However, the performance of this asset class depends on several factors.

First, commodity prices are typically quoted in US dollars. As the US dollar has become stronger, this decreases the demand for dollar-priced commodities. In addition, a strong dollar can result in deflation in the U.S. This can affect portfolios. The other reason to invest in commodities is if you're concerned about geopolitical events. In the past, there has been a direct relationship between commodity prices and inflation. However, that relationship has changed over time. For instance, the relationship was robust in the 1970s. Nowadays, it is far less significant.

A well-diversified allocation to commodities is the best way to mitigate the risk associated with unexpectedly high inflation. Additionally, commodities can have a positive impact on the long-term return of your portfolio. You can buy and sell commodities through commodity exchange traded funds or ETFs. While there is no sure-fire way to predict whether inflation is on the rise, commodities have the potential to beat the inflation curve. Historically, the investment in diversified commodities performed the best when overall inflation was near or at the Federal Reserve's 2% target.

When it comes to identifying the best way to manage your inflation risk, think carefully about your objectives. Your portfolio could be affected by the falling stock and bond prices, falling interest rates, and other factors. Using a diversified combination of equities and fixed income, or a mixture of the two, will likely give you a better chance of beating inflation.

During periods of high inflation, equities and bonds tend to underperform. By boosting your exposure to the asset classes with the most attractive expected returns, you can mitigate this risk. Commodities have had a rough ride, but they have survived the past couple of years. They are currently in a super cycle. It is possible that they will continue to improve over the next few months.

High-Yield Bonds

High-yield bonds have had a strong run. They're an asset that typically performs well in rising interest rate environments. In fact, high-yield bonds have returned 8% annually in the last tightening cycle.

A few key factors have been driving this performance. These include a surge in consumer demand and higher inflation. As with any asset, it's important to be cautious when investing in high yield. The Fed's policy of raising rates is likely to have a negative impact on the economy. However, the underlying growth outlook is still very healthy. This will likely help keep default rates low. Until the Fed reaches its 2% target, the Fed will remain in a steady rate hike cycle.

As rates continue to rise, investors should be wary of short-term volatility. Historically, the impact of higher interest rates takes six to 18 months to show. Therefore, a lot of market attention will be focused on this year's signals from the Fed and market.

The US high-yield corporate credit market should perform reasonably well in most scenarios. For instance, there is little repricing risk for most sectors. Moreover, if inflation remains at a moderate pace, corporate earnings should also continue to grow. Overall, the bond market is flush with attractive yields. Nevertheless, the Fed's aggressive rate hiking cycle has been only beginning to affect the economy. Unless the economic outlook turns sourer, the Fed should be able to sustain its rate hikes for several more years.

Some of the key risk factors to consider are repricing vulnerability, market-based inflation expectations, and longer-term interest rate expectations. Generally, interest rates tend to follow long-term economic growth trends.

Interestingly, the five-year real yields on Treasury bonds are now at their highest levels since 2009. Furthermore, real returns have exceeded inflation in the past few years. It's also important to consider the potential for positive real yields in the future. While the Fed may need to increase rates more than expected, there are other sources of offsets to help mitigate the effects of rising rates. One example of an opportunity is the emerging market high-yield bond market. Emerging-market bonds offer investors a high real yield, with high real return, at low risk.

Real Estate

Investing in real estate has become the preferred investment choice for people looking to hedge against inflation. According to a survey conducted by RealVantage, 73 percent of respondents said that they would rather invest in real estate than bonds or equities to hedge against inflation.

Historically, real estate has performed well when inflation is high. This is because real estate prices rise with inflation. In addition, rising home prices lead to an increase in rent, which will compensate for the rising cost of living. It also offers an investment that is more stable than other assets.

During the past 30 years, real estate has provided an average annual return of five percent. It has consistently performed as one of the best long-term investments.

Although it has been criticized for its volatility, real estate has been proven to beat inflation over time. One of the reasons why it is a good hedge against inflation is that it is less volatile than equities and bonds. Another reason why it is a good hedge against inflation involves the ability to earn recurring income. A homeowner can rent out their entire property, or they can rent out an apartment or a basement suite. After the mortgage has been paid off, this can be a source of passive income.

There are also some tax benefits associated with owning a primary residence. However, the downside to investing in real estate is that you may not be able to beat inflation.

While real estate is a great hedge against inflation, it can be difficult to determine how much inflation will impact your portfolio over the next few years. For instance, the recent rise in mortgage rates could put your investment at risk. If you are interested in protecting your money against inflation, you may want to consider co-investing in physical real estate with other investors. Using leverage to buy assets can increase your returns and can multiply your money into a small fortune. But you must be able to easily convert your money into other assets.