Investing During Times of Inflation

Inflation has recently been a concern for most Americans, as rates have nearly reached unprecedented levels. With the current high rate of inflation, it can negate any interest earned on investments making it challenging for investors to yield profit. 

With increasing movement in the overall price level of goods and services in an economy, how do investors adjust their portfolio to ensure it's guarded against the volatilities that come with it? And how does one make a return on their investments? During these inflationary periods, it’s important to diversify your portfolio because concentrating all your assets into one area may be susceptible to volatility. A well diversified portfolio of investments spread across different asset classes and industries can protect you from risk.

Recent Drivers of Inflation

Over the past few months, we have seen a surge in prices as inflation has skyrocketed across all aspects of American life. During the pandemic’s lockdown, many Americans were underspending, as they did not have the ability to spend on certain sectors such as entertainment and travel. Many households eventually shifted to buying more durable goods, which saw a near 25% increase in 2021 from 2020. People started to purchase items such as sporting equipment, furnishings, home renovations, cars, and electronics to adjust to living and entertaining themselves under the circumstances of a pandemic. 

Current Rate of Inflation

The surge in spending on durable goods stretched an already fragile supply chain to a near breaking point. It became a classic case of “too much money chasing too few goods.” With supply chains unable to keep up with demand, coupled with the country’s “great resignation,” rising wages, historically low interest rates, and government stimulus payments have resulted in an unprecedented magnitude of inflation, with the rate recently reaching a 40-year high at 7.5%. 

Real Assets & Commodities 

Historically, real assets and commodities have done best during times of inflation; they are regarded as investments that hedge against inflation, this also includes gold, which is often seen as an “alternative currency.” However, when certain major global events occur, such as the current war in Europe between Russia and Ukraine, it has increased the price of commodities and gold, making it a risky investment now.  

Fixed Income Investments

Investing in certain fixed income sectors may be a safer choice and help soften the negative impacts of total return during times of inflation. These typically include Treasury Inflation-Protected Securities (TIPS) and bonds. However, with interest rates reaching extreme lows at the start of the pandemic, bonds may no longer be a worthwhile investment. Two-year bonds now yield just over 1.5%, and 30-year bonds yield only 2.25%. 

Treasury Inflation-Protected Bonds (TIPS)

On the other hand, TIPS are a type of Treasury Security issued by the U.S. government that are indexed to inflation to protect investors from a decline in the purchasing power of their money. With TIPS, rather than to have the yield increase, as inflation rises, the principal amount adjusts in price to maintain its real value alongside inflation. At the same time, the interest payment varies with the adjusted principal value of the bond. The principal amount remains protected as investors will never receive less than the originally invested amount; however, you might not yield too much interest above your principal amount, given that interest rates are still quite low. 

Real Estate

Real estate also tends to do well during periods of higher inflation as property values and rent often increase to keep up with inflation. Investors use real estate as a hedge against inflation by capitalizing on cheap mortgage interest rates. Property owners pass on the rising costs to tenants by increasing their rent, while also benefiting from rising home values over the long-term. Real estate prices often increase during inflationary times because investors search for assets that generate yield above and beyond the rate of inflation. Another reason why real estate increases alongside inflation is because there is a limited amount of property compared to fiat currency. Thus, when the money supply grows due to greater amounts of money being printed, real estate prices should also increase. 

Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are another type of real estate investment that tends to do well during inflation. REITs are companies that own real estate, which can range anywhere from apartment rental buildings to commercial properties. Roughly $1.6 trillion is invested in U.S. REITs, and because of their legal structure, they are required to pay out 90% of their taxable income to shareholders in the form of dividends. These dividend payments are usually made out quarterly or monthly. The average REITs tend to yield higher returns, currently paying an average of 3%, but they also tend to be a riskier investment than bonds. 

Short Notes 

Connect Invest also offers an alternative way to invest in real estate through Short Notes. Short Notes are a fixed income investment in collateral-backed loans. With Short Note investments, there is no direct impact on your principal amount, and they yield higher interest rates than bonds. Short Notes also offer more flexibility for the investor during these volatile periods as people can choose from investment periods as low as 6 months at an interest rate of 5.5%, 12 month period at 7.25%, and 24 months at 9.0%, with a minimum investment of $500. Connect Invest’s Short Note investments fund various real estate projects throughout the country. All investments are funded throughout different stages of the project, including the acquisition, development, and construction phase. 

Learn more about Connect Invest and its Short Note investments here.