Summary: As inflation erodes your money’s buying power, it’s crucial to make your hard-earned dollars work for you. Fortunately, you have more control over inflation’s impact than you think. In this guide, we will delve into the most effective strategies to beat inflation and secure your financial well-being, as well as introduce some reliable allies, such as Interactive Brokers (IBKR), that can support and streamline your investment journey, transforming the challenge of inflation into an opportunity for growth.
Best Platform for Worldwide Stock Trading & Investing
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Highly trusted multi-asset broker with clients in over 200 countries
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Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)
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Low commissions starting at $0 with no platform fees or account minimums
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Easily fund your account and trade assets in 26 currencies
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IBKR pays up to 4.58% interest on cash balances of $10k or more
What is inflation?
Inflation is the rise in the cost of goods and services that effectively erodes the purchasing power of money over time. It means you buy less for $100 today than yesterday. In short, inflation reduces the value of the currency.
What is the Consumer Price Index (CPI)?
The Consumer Price Index measures the average shift in consumer prices over time, calculated and published by the Bureau of Labor Statistics. This index is built upon around 80,000 monthly price quotes collected from approximately 23,000 retail and service outlets, as well as 50,000 rental homes. The CPI is a widely used indicator of inflation, providing vital insights into the health and trajectory of the economy.
According to a recent Commerce Department report, the US annual inflation rate fell below 3%. This marked a significant reduction from the year before when soaring energy prices pushed inflation to peak at 9.1%, the highest since 1981. In other words, the inflation rate has consistently declined for 12 straight months and is currently at its lowest level since March 2021.
4 ways to beat inflation
While inflation is an intrinsic element of any economy, a disciplined investor can prepare for its impact by building a portfolio of asset classes that thrive in inflationary conditions.
Consider the following asset classes when looking to safeguard your investments against inflation.
1. Stocks
Putting your money in a diversified portfolio of stocks offers an excellent defense against inflation. In fact, over the past ten years, the S&P 500, regarded as the best gauge of the US stock market and economy, yielded an average annualized return of about 13.09% per year. Once inflation is accounted for, the return remains at a healthy 10.22% per annum.
To tap into this historical growth, simply choose an index fund or exchange-traded fund (ETF) that tracks the market benchmark, and you’re ready to go. These funds, containing hundreds of stocks, offer an easy and low-cost option to diversify your portfolio, minimizing risk and simplifying portfolio management.
If ethical considerations are important to you and you prefer not to support companies that don’t align with your values, you might want to opt for an Environmental, Social, and Governance (ESG) fund as an alternative.
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Where to buy stocks?
Our top recommendation for an online broker is IBKR. Loved by over 2.2 million users, it is fully authorized and regulated by relevant governing bodies like The US Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).
Moreover, IBKR brings with it a variety of impressive features, including:
- Commission-free stock and ETF trading;
- Global stock-trading on 90+ market centers;
- Fractional shares;
- Earn extra income by lending your fully-paid shares of stock;
- Lowest financing rates for margin accounts in the industry;
- No account minimum.
Best Platform for Worldwide Stock Trading & Investing
-
Highly trusted multi-asset broker with clients in over 200 countries
-
Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)
-
Low commissions starting at $0 with no platform fees or account minimums
-
Easily fund your account and trade assets in 26 currencies
-
IBKR pays up to 4.58% interest on cash balances of $10k or more
2. Real estate
Real estate, a tangible asset with intrinsic value, can serve as an effective buffer against inflation, given the constant demand for housing, irrespective of the economic climate, and because as inflation grows, so do property values.
Here’s the challenge with real estate, though. To purchase a property outright, you’ll need significant initial capital as well as deal with the various ongoing expenses related to financing and maintenance. This is where Real Estate Investment Trusts (REITs) come into play, offering a streamlined avenue to real estate for everyday investors for a fraction of the cost.
Investing in REITs is like buying a fund that exclusively holds real estate assets. REITs are publicly traded and can be bought or sold via an online broker, like IBKR, making them the most liquid real estate investment available. Best of all, REITs are required to distribute regular dividends, making them especially attractive to income investors.
Best Platform for Worldwide Stock Trading & Investing
-
Highly trusted multi-asset broker with clients in over 200 countries
-
Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)
-
Low commissions starting at $0 with no platform fees or account minimums
-
Easily fund your account and trade assets in 26 currencies
-
IBKR pays up to 4.58% interest on cash balances of $10k or more
3. Treasury Inflation-Protected Securities (TIPs)
Treasury Inflation-Protected Securities are a type of US Treasury bond specifically designed to grow in value in line with inflation. Their backing by the US federal government makes them one of the world’s safest investments.
These bonds are tied to the Consumer Price Index, and their base value adjusts based on changes in this index. TIPs pay interest semi-annually at a fixed rate applied to the adjusted base value. The principal goes up with inflation and decreases with deflation. They are available in three maturity periods: five-year, 10-year, and 30-year.
Of course, there are certain risks associated with TIPs. Most glaringly, their sensitivity to changes in interest rates, i.e., if you decide to sell your investment before it matures, you may do so at a loss.
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4. Commodities
Because the price of commodities such as oil, copper, cotton, soybeans, and wheat, along with the prices of finished goods derived from them, typically rise when inflation is accelerating, they offer protection from the effects of inflation.
What’s more, because commodities, on average, have low or negative correlations with traditional asset classes like stocks and bonds, they can provide much-needed diversification to your portfolio.
Apart from buying the raw materials outright, there are various ways of investing in commodities, including:
- ETFs and mutual funds that track the commodity;
- Derivative instruments that speculate on the underlying asset’s price, such as contracts for differences (CFDs)
- Futures contracts;
- Buying stock in companies that produce commodities or ETFs in commodity-related industries.
You can trade all of the mentioned instruments on Interactive Brokers.
Best Platform for Worldwide Stock Trading & Investing
-
Highly trusted multi-asset broker with clients in over 200 countries
-
Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)
-
Low commissions starting at $0 with no platform fees or account minimums
-
Easily fund your account and trade assets in 26 currencies
-
IBKR pays up to 4.58% interest on cash balances of $10k or more
Note
Tips and tricks to survive inflation
Beyond investing, here are a few strategies to help mitigate the impact of inflation:
- Reexamine your budget: If you don’t already have a budget, now is the time to create one. If you do, ensure it’s up-to-date. Now, look for opportunities to cut costs. For example, while you may not be able to control the spike in the cost of living, you could opt out of some subscription services;
- Add income sources: Along with finding ways to cut costs during high inflation, look for ways to increase your income. Consider adding a side job or gig to help keep up with rising costs and provide a safety net in case of layoffs. Explore your skills for potential side hustles, or consider renting out space in your home if you have it;
- Prioritize paying off high-interest debt: Ensure you have repaid any high-interest debt before investing. That includes credit card debt and debt from other loans, such as payday loans. For instance, the average credit card interest rate in 2022 was 19.42%, significantly higher than the average annual stock market return;
- Switch to a high-yield savings account: Inflation will eat away at your savings, so make sure you park it in a high-yield account. See our pick for the best interest rate savings account for 2024 here;
- Invest in yourself: By far, the best investment you can make to prepare yourself for an uncertain financial future is an investment in yourself. The goal is to continuously update and add to your skill set, whether through a formal degree, vocational training, or self-guided learning to meet the ever-changing demands of the job market. Ultimately, investing in yourself will not only future-proof your career against potential recessions and inflation but also contribute to personal fulfillment and life satisfaction.
In conclusion
Investing during inflation offers two main advantages. Firstly, it helps to preserve the value of your money. Secondly, it provides an opportunity for your savings to continue to grow.
However, it’s crucial you don’t let inflation dominate your investment strategy. Instead, stay focused on your specific investment goals and timelines. For instance, over-allocating to TIPS can compromise your portfolio’s potential for capital appreciation. Similarly, purchasing long-term growth stocks may not be advisable if you’re nearing retirement and require immediate income. Ultimately, hedging against inflation shouldn’t force you beyond your risk tolerance.
Unfortunately, there are no guarantees. Traditional assets known to hedge against inflation may not always perform as expected, and adverse economic circumstances can sometimes reward unexpected asset classes while leaving previously solid performers behind.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
FAQs about inflation
What is inflation?
Inflation refers to the rate at which a currency is decreasing in value, resulting in an overall increase in the prices of goods and services.
How is inflation measured?
The Consumer Price Index (CPI) is a well-known measure for inflation that tracks the price change in the cost of a typical basket of goods and services consumed by urban households.
What causes inflation?
Inflation is caused by a rise in production costs or increased demand for goods and services.
How to fight inflation?
As opposed to holding on to cash, one of the most effective strategies to combat inflation for consumers is to invest in assets that yield returns that outpace the inflation rate. A prime example of this is investing in a diversified index fund that tracks a broad market index such as the S&P 500. This approach will not only diversify and grow your portfolio but also minimize the risk of potential losses arising from inflation.
Best Platform for Worldwide Stock Trading & Investing
-
Highly trusted multi-asset broker with clients in over 200 countries
-
Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)
-
Low commissions starting at $0 with no platform fees or account minimums
-
Easily fund your account and trade assets in 26 currencies
-
IBKR pays up to 4.58% interest on cash balances of $10k or more
