Ways of Investing During Inflation
When the Federal Reserve subdued inflation in the 80s, it was though the problem issue was over for good. Then the 90s came roaring and solidified public perception regarding the demise of the inflation. Inflation was low, unemployment lower, and prices manageable. Everyone was happy.
But then, after so many years of bliss, the gallon of gas began to cost more. Prices of commodities went up. And people were faced with the prospect of ever-decreasing room for spending. People who had never see the likes of inflation were suddenly forced to seek their elders’ advice about how they should cope with the increasing prices.
In the 90s, the stock market reached new high levels. However, inflation was high at that time too. Appreciation in stocks is also a form of inflation. However, too much of a good thing is also toxic. The market went out of control and busted.
Too much money in the market causes inflation. The dot-com fiasco and the housing bubble are both caused by the Federal Reserve allowing the supply of money to grow faster than necessary.
The extra cash is being manifested in consumer prices rather than assets. Since people are no more interested in either stocks or houses, investors with extra money are turning towards alternative investment options like precious metals, gold, oil and food.
There are no signs that the Federal Reserve will change its stance the near future. It means that the investor must cope with the effects of inflation on his own. There are a few simple strategies that can be implemented by investors in order to protect their portfolio from inflation.
The first strategy is to allocate part of your portfolio to gold. Gold is a hard asset the value of which increases during inflation. Gold can be physically purchased from a bank. However, it must be kept in mind that the storage costs of gold can be very high. Another way is to by shares of a gold mining company. However, the shares of these companies do not appreciate in proportion to the actual increase in price of gold.
An investor may also invest in commodities. The prices of commodities also increase in inflation. The most suitable way of investing in commodities is by purchasing shares of such companies. There are some great international oil companies whose shares an investor can buy. The investor may not be able to reap the whole reward of a price increase in oil, however, he will be more protected in case the price falls dramatically.
Another way of investing during inflation is to place your money in real return bonds. They are simply known as Treasury Inflation Protected Securities. The value of Treasury Inflation Protected Securities (TIPS) rise with inflation. The payments of these bonds are linked to the consumer price index. These bonds can be purchased from the US Treasury Department through their website.
And finally, of course, stocks are the most viable option. Knowing how to invest and what to invest in is challenging, but the returns are typically far superior to that of any other investment. Knowing the best penny stock alerts can help increase your portfolio wealth fast, otherwise a diversified portfolio with blue chip stocks can provide handsome dividend returns.
If you are holding part of your investment portfolio in commodities, precious metals and real return bonds, you will have the satisfaction of knowing that your portfolio is secure against the adverse effects of inflation.