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Best Investments To Beat Inflation – Forbes Advisor - Forbes

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Rising prices have become an unavoidable fact of life for most Americans. You hear about inflation in the news, you see it at the grocery store—and hopefully you’ve thought about how inflation is impacting your investments.

“Inflation is the silent wealth killer,” says Chris Berkel, investment advisor and founder of AXIS Financial in Edmond, Okla. “Inflation has the potential to erode the purchasing power of an investor’s portfolio, even if they maintain positive returns year-over-year.”

Your long-term investments will need to earn at least 3.7%, the average U.S. inflation rate going back to 1960, to keep from losing ground. Here’s a look at investments that have stood the test of time in helping investors combat inflation.

Beat Inflation by Investing in Gold

Gold is the oldest hedge against inflation. The yellow metal has seen an average annual gain of 9.48% over the 20 years between September 2001 and September 2021. Over the same period, inflation averaged 2.4%, netting investors a 7.08% rate of return.

Just don’t go dumping your life’s savings into gold, as there are some other factors you’ll need to understand about investing in gold.

If you invest in physical gold, there are additional costs in storing and insuring coins and bullion, which eat into your returns. Investing in gold-focused mutual funds and exchange-traded funds (ETFs) can vastly reduce these costs, but it’s still important to remember that the price of gold is highly volatile, especially over the short term.

You’ll also need to understand whether your fund of choice aims to track the price of gold or rather gold mining companies. Both can be decent ways to play the gold market, but their returns may vary considerably.

Invest in Stocks to Beat Inflation

Investing in a diversified portfolio of stocks is an excellent way to fend off inflation. From September 2001 to September 2021, the SP 500—a key benchmark for U.S. stocks—generated an average return of around 9.5% (with dividends reinvested). After accounting for inflation, you’re still looking at about 7% average annual returns.

Even with today’s substantial price gains, you’d still have soundly trounced rising prices: From November 2020 to November 2021, inflation rose almost 5%. During the same period, the SP 500 jumped over 32%, with dividends reinvested.

There’s no real need to resort to picking individual stocks, which can be research intensive and incredibly risky, to benefit from this kind of historic growth. Get started by choosing an SP 500 index fund or SP 500 ETF, which track the index’s return and keep costs ultra low. Because they contain hundreds of stocks, they provide simple, low-cost diversification, which reduces risk and portfolio management headaches.

Remember, investing in stocks is never risk free. You may lose money in the short term, and with stock index funds you don’t get to choose what companies the fund invests in. If you’re concerned about keeping your money out of companies you don’t agree with ethically, consider choosing an environmental, social and governance (ESG) fund instead.

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Beat Inflation with Real Estate

Many inflation-averse investors turn to real estate to hedge their holdings, although the size and variability of the market can make it very difficult to generalize about this particular asset class.

An analysis by the Massachusetts Institute of Technology (MIT) found that retail property has proven to be the best category of real estate to beat inflation, while apartment buildings and industrial properties did somewhat less well. The MIT analysis attempted to factor in inflation growth, maintenance costs and appreciation when deciding what kind of real estate performed best over the long term.

Owning single-family homes can provide a hedge against inflation, depending on local market conditions. Taken in aggregate, home values in the U.S. have seen 4% average annual growth since 1991, according to the Federal Housing Finance Agency. But this data does not factor in maintenance or any other costs.

Here’s the trouble with buying real estate: It requires big buy-ins and a variety of costs for financing and maintenance. That’s why real estate investment trusts (REITs) can provide a simple way for regular investors to diversify their portfolios and get the inflation hedging benefits of real estate.

When you invest in REITs, it’s like buying a fund that exclusively owns real estate assets. Regulations require them to pay out regular dividends, making them particularly appealing to income investors.

And REITs have historically offered strong performance: As of November 2021, the MSCI U.S. REIT Index is up almost 32% for 2021, and its average annual return over the past decade has been 10.90%. That’s a great way to beat inflation.

TIPS Are Designed to Beat Inflation

Treasury Inflation-Protected Securities (TIPS) are designed to protect your investment from rising prices. The U.S. Treasury sells TIPS and adjusts their par value each year to keep up with inflation. This boosts your interest payments, and it also ensures you’ll likely see some appreciation from inflation-adjustments too.

While the inflation-protection aspect of TIPS can make them appealing, just remember that they’ll really only be able to preserve purchasing power, not necessarily provide growth. Over the past 10 years, the iShares TIPS Bond ETF, which tracks a TIPS index, posted average annual returns of just over 3%.

If you invest in TIPS, you’ll also need to watch out for deflation. Though you’ll never receive less than the original par value of a TIPS when it matures, its value can still decrease while you’re getting interest payments.

Beat Inflation with I Bonds

Series I savings bonds, better known as I bonds, are another government-issued security designed to beat inflation.

Like TIPS, they preserve your money’s purchasing power by making regular interest adjustments based on prevailing inflation. Unlike TIPS, they don’t tinker with the par value of your bond; instead, they change interest rates every six months based on current inflation.

That can work out pretty well for you these days. Interest rates are over 7% until at least April 2022. But I bond interest rates change constantly and can go to zero. That means that though you’re guaranteed not to lose your initial investment, it still can be eaten away over time by inflation if interest rates fall.

What’s more, I bonds come with pretty hefty lock-in dates. You can’t cash out an I bond for at least a year after you buy it, and for the next four years, you’ll owe three months of interest as a penalty if you cash it out, much like a certificate of deposit (CD).