Here are my tips on the best ways to fight inflation:
#1 – Own your home (or other real estate)
Home ownership provides some valuable protection against inflation. If you have a mortgage and inflation creeps up, your bank will take the hit, not you. Homeowners still experience inflation in other areas such as real estate taxes, repair and maintenance costs, and insurance premiums. But the cost of the housing itself will remain well protected.
If you would rather rent your home or if you have been unable to buy a home in the current market, consider investing in a low-cost real estate investment trust (REIT). These investment funds provide diversified exposure to real assets for a reasonable cost.
#2 – Spend money earlier (if you were going to anyway)
If you have a large purchase (or even a series of small ones) planned for the near future, and you think the price will increase over time then don’t wait. In this era of low interest rates, it’s unlikely that your bank is paying enough interest to make up for inflation. So waiting just means that your money will not be worth as much as it is today.
Don’t go overboard. Spending for spending’s sake is not the answer. Be sure to maintain an adequate emergency fund. If you have savings that you don’t plan to spend anytime soon, consider the next step.
#3 – Invest in stocks
Historically, stocks have done the best job protecting against inflation. There are a couple reasons for this. First, many businesses have “pricing power” or the ability to raise prices in response to inflation. This helps to protect revenue and profit margins from inflation.
Even with inflation, stocks still benefit from their exposure to global economic growth and technological improvement. All an investor should really care about is the “real” return or return after deducting the cost of inflation. As long as the global economy keeps moving forward and technology improves, stocks will remain a solid bet over the long-term.
That’s not to say there won’t be hiccups and market corrections along the way. All markets are subject to corrections and sell offs. But over long periods of time, stocks have demonstrated a strong ability to outperform inflation.
#4 – Skip the shiny metals
Lots of advisors might recommend investing in precious metals such as gold. This is a mistake in my opinion. Gold often does a decent job providing protection during short-term changes in inflation or economic shocks. But over the long-term, gold is a loser.
The main issue is gold doesn’t really do anything or produce anything. Here’s a great anecdote from Warren Buffett:
Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
…
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Warren Buffett (from Berkshire Hathaway 2011 Annual Letter)
Let’s set aside the fact that Exxon Mobil isn’t exactly the world’s most valuable company any more (although it has had a nice recovery recently). You could frame a similar example today around Apple or Amazon. The reality is that Buffett is right. The cube of gold will be exactly the same in 100 years as it is today (maybe a bit bigger). But it will have produced nothing that you can use to feed or clothe yourself, or even anything that improves your life. Gold produces nothing. It just sits there looking nice.
#5 – Buy TIPS… or not
Some investors point to Treasury Inflation Protected Securities (TIPS) as a great tool to protect against inflation. And certainly in 2021, TIPS more than proved their worth. However, it’s important to remember that TIPS, like all markets, are priced based upon expectations of what will happen, not on what actually happens.
So in early 2021, TIPS performed well as inflation numbers creeped up and the Federal Reserve kept claiming inflation was transitory so there was no need to fight it. As more and more market participants developed an expectation of future inflation, they started buying TIPS and driving up prices. Fast forward to late 2021/early 2022, and the Fed has re-framed the debate. Now the Fed is ready to raise interest rates and fight inflation (or at least they are trying to convince the market that they are). So the expectation of future inflation has dropped considerably. And TIPS have return about negative 4% so far in 2022.
#6 – Be wary of digital assets
Digital assets such as Bitcoin, Ethereum, digital real estate, or non-fungible tokens (NFTs) represent some exciting investment opportunities. But I like to tell people that the easy money has already been made. It’s unlikely that most of these assets will see future returns anywhere close to those of the past few years.
And there is plenty of junk in this space. Seriously, it’s like the Wild West out there. Celebrities are pitching a lot of snake oil and there is a real risk of losing your investment.
If you want to put a small portion of your investment portfolio into digital assets, go right ahead. Unfortunately, there aren’t any low-cost, passive investment choices in this space, so you’ll need to do your research to find the best opportunities.
#7 – Career improvement
Although it’s easier said than done, improving your career prospects offers another powerful way to fight inflation. If you can find a better job or increase your professional skill set, then you’re making good progress in the fight against inflation. Higher compensation can lead to a virtuous cycle of increasing savings and investing opportunities, which in turn can offer even more inflation protection.
#8 – Reduce investment costs
Reducing your investment costs can also provide a powerful way to fight inflation. And I know I sound like a broken record, but I feel like I can’t say it enough. All else being equal, reducing costs offers a one-for-one improvement in investment returns.
Use low-cost, passive investment funds. If you think you’ll benefit from working with a financial advisor, consider using one that charges a reasonable, flat fee or even by the hour. For many people, the fees paid to their financial advisor represent the single biggest household expense, even higher than the “big 4” budget items of food, shelter, transportation, and health care. Call me crazy, but I doubt any financial advisor provides more value than the roof over your head or the food in your pantry.
