How to profit from Inflation

Zimbabwe, November 2008

Highest monthly inflation: 79.6B% (79,600,000,000%)

Equivalent daily inflation rate: 98%

24 hours was the amount of time it took for prices to double during this period in Zimbabwe. Through the reserve bank, the government issued a $100m Zimbabwean bill, followed by a $200m bill. At that time, withdrawals were restricted to $500,000. The equivalent of $0.25 US was then available for withdrawal. With this influx of printed money, the price of essential commodities soared into the millions. A loaf of bread went from $2 million to $35 million in one night, for instance.

Events in Zimbabwe are one of the examples of Hyperinflation, which is a rapidly rising inflation, typically measuring more than 50% per month. In Zimbabwe, monthly inflation went as high as 79.6B%.

For developed economies, hyperinflation is unusual, but inflation is more common, and it becomes problematic when incomes fail to keep up with or exceed inflation. When that happens, people become poorer even when they think they are earning more money. There are winners and losers when inflation sets in.

The Losers? Workers.

A cup of coffee used to cost the average person a dime decades ago. Today, the price is somewhere around three dollars. Consumers with constant wages will find it more challenging to keep up with price increases as the purchasing power of their currency goes down.

“In 2018, most workers in the U.S. had seen their meager wage gains erased by inflation. The labor Department reports inflation is outpacing wage increases of 2.7 percent over the same period, as the cost of living increases by 2.9 percent. Taking inflation into account, the average U.S. "real wage," a federal measure of wages, fell to $10.76 in October of that year, down 2 cents from the previous year.” - The Washington Post

It hurts employees since they can only sell their time, which does not protect them against inflation well enough. The salary increases typically come after inflation, thus leaving them feeling that $20 feels like $1 due to inflation.

In every economy, while there are losers during inflation, there are those who use inflation to get richer.

The Winners? Business owners and Investors.

Although inflation provides little economic benefit to consumers, well-informed investors will gain from rising prices if they invest in markets affected by inflation. For example, those who invested in commodities and real estate see a rise during this period.

Companies and business owners benefit from inflation by charging higher prices for their goods as a result of a boom in demand. In an economic boom and when homeownership is in high demand, home-builders can charge higher prices.

Investing in asset classes that outperform the market during inflationary periods is one of many ways to profit from inflation. Inflation-hedged asset classes can help you grow your portfolio. By keeping these on your watch list and then finding them when inflation begins to emerge as part of an organic growth economy, you can maximize returns when inflation arrives.

Profiting from Inflation

In this video, you will see 5 guaranteed ways you can profit from inflation. After this video, you will not dread it but see it as an opportunity to make more quids. You can profit from inflation by investing in:

• Gold and commodities

Investors who invest in commodities are protected against inflation due to the very nature of commodities. It is common for prices to rise when consumers demand commodities during times of high inflation. In addition, it makes a good play against the U.S. dollar; when the greenback slumps, commodity prices rise.

In the world of commodities, gold, oil, and base metals are the most commonly traded.

As protection against almost any type of trouble, from inflation to economic disruptions, currency fluctuations to war, gold has proven to be an enduring investment instrument because it is a tangible, tangible asset that holds its value over time. Gold investments can be made in a variety of ways, depending on your preferences and risk appetite. Physical gold, gold stocks, gold ETFs and mutual funds, as well as futures and options contracts, are all options open to you for investing in gold.

If you are the more traditional person who likes seeing your assets, you can purchase a box of Gold bullion, Jewelry, or coins and keep them in your home vault. If you have Aurophobia or the purchase of physical Gold gives you the scare, stocks of mining companies, ETFs, and mutual funds are for you. In this case, you are purchasing paper that is backed by equity of Gold mining companies.

For instance, you can also choose to invest in the Newmont Corp stock (NEM), as they are the world’s biggest mining company. They operate mines in North and South America as well as Africa.

If you are someone not averse to taking risks, you can invest in Gold through Futures and Options contracts. If you choose to go through this part, you sign up with an online broker that offers this service. Most brokers allow you to use a certain degree of leverage. With this comes great responsibility, as the way you use them can determine your gains and losses.

Oil and Base Metals such as Aluminium, Zinc, and Copper are traded in similar ways. You have the option to hold stocks in oil companies, crude oil mutual funds, and buying shares in Energy sector ETFs.

• Real Estate and Real Estate Investment Trusts (REITs)

Property values increase over time, and real estate is a popular choice to resell and produce rental income. In the same way that the value of a property rises with inflation, tenants also pay more each month.

An investment property owner can generate income through these increases and keep up with the general price rise throughout the economy. You can invest in Real Estate either through direct ownership of property or indirect involvement in securities, such as a real estate investment trust (REIT).

A real estate investment trust (or commonly known as REIT) is a company that owns and manages properties that generate income. These REITs pool in funds from you and other investors and then use this to invest in real estate and then pay dividends to their investors. Consider investing in Vanguard Real Estate ETF, which provides broad exposure to real estate with low fees.

Directly owning a property works well with inflation because you can earn income from renting out a property. With inflation, property values rise, which increases the rental amount you as a landlord can charge. In the long run, this leads to a higher rental income for you, making it easier for you to keep up with inflation.

• Inflation-indexed Bonds

Investing in Inflation-indexed bonds guarantees an ROI higher than the inflation rate because these bonds link their capital appreciation directly to an inflation index such as the Consumer Price Index. When you invest in such bonds, you link your investment to changes in inflation rates, and this means your principal and interest are protected from inflation.

You can invest in the Treasury Inflation-Protected Securities (TIPS) as they are the most common option in the USA that is pegged to the CPI. As inflation rises, the consumer price index goes up, the value of your TIPS investment and the interest accrued rise along since they are both pegged to the CPI.

Of course, this presents a downside: when a decrease in CPI or deflation sets in, the principal amount will decrease. Because TIPS are also dependent on any change in current interest rates, you might lose your money if you sell before maturity. You can access TIPS by opening a brokerage account or through the U.S. treasury.

• Stocks

Stocks are your friend in almost all stages of the economy. During inflation, they can help you keep up by making you profitable. The S&P 500 allows you to keep up with inflation because it comprises capital-light businesses such as Technology and Communication Services.

You can invest in S&P 500 through the SPDR S&P 500 ETF. The drawback for the S&P 500 is that it gives ranking and weight to companies with a bigger market capitalization than one with a lower market cap. The ones with a lower market cap provide a higher return on investment.

• 60/40 Stock/Bond Portfolio

Having discussed investment in Stocks and Bonds as ways, you can profit from inflation. The combination of both also offers you a guaranteed chance of profiting, but with greater safety. The 60/40 Stock/Bond Portfolio gives you a taste of both worlds by providing a portfolio mix of Bonds and Stocks.

You can create this portfolio yourself by doing research. You can also employ the services of an investment advisor to help you assemble such a portfolio. If you want neither, you can invest directly in Dimensional DFA Global Allocation 60/40 Portfolio (I) (DGSIX).

A 60/40 Stock/Bond Portfolio is not as profitable as an all-equity portfolio because you will be trading higher returns you would have gotten from a portfolio with stocks only for lesser risks and safety.

With all being said, there are many other ways to profit from inflation. You shouldn’t be afraid of inflation but see it as an opportunity to make more money. Plan for it, save for it, and you can start investing in anticipation of it.

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