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Written by Kevin Mercadante on August 31, 2021
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Best Inflation Proof Investments In 2021

Inflation seems to be everywhere these days, and it’s not just talk among economists. A trip to the grocery store, the gas station, an auto parts store, or Best Buy is making the point clear that prices have been on the rise in the past year, and more than just a little.

You know what inflation is doing to your paycheck, but have you considered the impact it can have on your investments?

Inflation is something of an “X factor” where investing is concerned. Some financial planners and many investment websites prefer to tiptoe around it. It’s an inconvenient obstacle when you’re trying to paint pretty-looking portfolio projections 30- and 40-years out.

But if you’re a serious investor, inflation can’t be ignored – especially in the long-term. That’s why it’s important to identify and invest in the best inflation proof investments available.

What is Inflation?

Let’s start with a textbook definition. According to Investopedia, inflation is defined as:

…the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.

We’re not going to delve into the causes of inflation, but focus instead on the effect it has on your money, and especially your investments.

Data from the Federal Reserve shows that inflation has averaged right around 3% per year, going all the way back to 1913, when the Federal Reserve was created and began tracking financial data.

The figure of 3% is a rough average. During that 100+ year timeframe, there were years when inflation went negative and prices dropped (a.k.a., deflation), and others when it reached double digits – usually during wartime.

Using the Rule of 72, inflation results in a doubling of price levels roughly every 24 years. That seems about right – at least since the 1980s, given that we’ve managed to avoid the double-digit inflation levels of the 1970s and the two world wars during that time.

According to the CPI Inflation Calculator provided by the Bureau of Labor Statistics, it takes $1,507.58 in 2021 from what $100 did in 1928.

Best Inflation Proof Investments
Best Inflation Proof Investments

Based on that calculation, general price levels have increased 15 times since 1928.

Please keep that number in mind as we consider the best inflation proof investments.

What Inflation Does to Your Investments

The best way to demonstrate the impact of inflation on your investments is by working an example.

Let’s say you’re 40 years old, you have $100,000 in your 401(k) plan, and you want to retire by 65. You determine you’ll need $1 million in your 401(k) plan to be able to retire comfortably.

You earn $75,000 per year and calculate that contributing 10% of your salary to the plan will get you to the $1 million mark in 25 years, assuming an average annual rate of return of 7%. (For simplicity's sake, we’ll exclude an employer matching contribution, not the least of which because not all employers offer one.)

If inflation didn’t exist, the above projection would be right on the money – you’d be fully prepared to retire at age 65, with a $1 million 401(k) plan balance.

But Inflation Does Exist, and it Can’t be Ignored

At an average annual rate of 3%, you can assume price levels will roughly double between now and the time you retire (72 ÷ 3% = 24 years, which is close to your retirement prep time window).

When inflation is factored into the mix, you won’t need $1 million in 25 years – you’ll need $2 million.

In recalculating your 401(k) plan target balance, you realize you’ll need to make the maximum plan contribution each year to have any hope of reaching the $2 million mark. And since the current maximum contribution is $19,500 (or $26,000 if you’re 50 or older), you’ll also need to hope the contribution limit will steadily increase going forward.

The outcome is unlikely to be quite that dire. Maybe you are getting an employer matching contribution, and a generous one at that. And hopefully you’ll experience a steady rise in income that will make it easier for you to increase your contributions.

Be that as it may, the example above demonstrates what inflation can do to investments and investment plans.

inflation cant be ignored

The Best Inflation Proof Investments

Given the impact inflation has on investments, it’s best to choose those investments carefully. You may be surprised at what some of the best inflation proof investments are, and even learn you’re probably already well-positioned for higher inflation, at least in the long term.

Stocks

When we think of investments that respond well to inflation, gold and energy quickly come to mind. And while both do have a history of positive reactions to rising inflation, neither provides anything like the long-term inflation protection provided by stocks.

Consider that $100 invested in stocks in 1928 would be worth 592,868 in 2020. That statistic is based on the S&P 500, including reinvesting of dividends.

It means the value of your money increased an incredible 6,000 times over a span of 92 years.

There probably isn’t anyone around who’s been investing for the past 92 years, but the basic point still stands. Even and especially in the past 30 or 40 years, stocks have easily outpaced inflation.

Considering that the value of the dollar has declined by a factor of 15 since 1928, and an investment made in the S&P 500 index in 1928 (if it did exist at that time, which it didn’t) would rise by a factor of 6,000, you’d be well protected from inflation.

Even when inflation is considered, you’d still have an investment return of 400-to-1 in stocks between 1928 and 2020. There certainly were years along the way that inflation outpaced stocks. But if you’re a long-term investor you shouldn’t be bothered by relative underperformance for a few years. The long-term is what really counts.

How to invest in the stock market for beginners

Where and How to Invest in Stocks

You can invest in individual stocks, or in exchange traded funds (ETFs) that invest in stocks, through popular brokerage platforms.

Two we recommend include Robinhood and Webull. Both will enable you to invest in either individual stocks or ETFs, commission-free. And don’t worry if you don’t have much money to invest – neither Robinhood nor Webull have minimum investment requirements. You can open an account with no money at all and begin investing with just a few dollars.

If that’s not enough, both Robinhood and Webull enable you to invest in cryptocurrencies. That’s something you won’t get with the big name brokers.

If you prefer a managed option, take a close look at M1 Finance. They allow you to choose the stocks and ETFs you want to invest in, through mini-portfolios they refer to as “pies”. From there, they provide ongoing management of your investments.

M1 Finance is a robo-advisor that gives you complete control over the stocks and funds you invest in. And just as important, they provide that service free of charge. It’s truly one of the best investment platforms in the industry.

The Family Homestead

If you are your own home, you may already have one of the best inflation proof investments there is.

According to the U.S. Census Bureau, the median price of a house increased from $2,948 in 1940, to $119,600 in 2000. According to the Federal Reserve, the median price has risen to $347,500 early in 2021.

By dividing the current price of $347,500 by the 1940 value of $2,948, we get just about 118.

That means the median price of a house in the US in 2021 is 118 times higher than it was in 1940.

That too, is well above the inflation factor of 15 since 1913 cited earlier in this article. Clearly, simply by owning your own home you’ve already got serious inflation protection.

Commercial Real Estate

If you’re not a homeowner, or if you are in you want to supercharge your real estate returns, consider investing in commercial real estate.

You can do this through real estate investment trusts, or REITs. According to the industry group, Nareit, REITs – which typically invest in commercial real estate – outperformed stocks over longer time frames.

But commercial real estate is high-priced, and can be a notoriously complicated investment. It’s not an investment you would want to make directly by buying into an individual property.

Instead, you can invest in commercial real estate with a small investment, using real estate crowdfunding platforms, like Fundrise. With an investment of just $500, you can invest in a portfolio of properties that provide income, growth, or a combination of both.

If nothing else, an investment in Fundrise will give you a valuable diversification away from an all-stock portfolio. And in times of rising inflation, that may be exactly what you need. Real estate is, after all, the ultimate “hard asset”. Those are the kind that perform the best during times of inflation.

Investing in single family real estate to make money.
Real estate, like the home shown in this photo, can be a great investment and way to make money.

Commodities

Earlier we touched on gold and energy as potential hedges against inflation. Those are specific commodities that do have a history of responding well to inflation. But commodities in general tend to rise with inflation, and it’s not always certain that gold or energy will be the best performers during a time of rising prices.

Especially in today’s complex economy, with its heavy dependence on specialty commodities, like rare earth metals and lithium, you may be able to isolate better investments than gold and energy.

Few investors have the stomach to invest in the commodity markets directly, but you can take advantage of these raw materials by investing in the stocks of companies that either supply or process them.

Once you find those stocks – or the funds that invest in them – you can invest through M1 Finance, Robinhood and Webull.

But if you do invest in commodity-related stocks, keep a close eye on trends. While it’s true that certain commodities can have massive price increases, they often equally dramatic declines whenever prices reach a point where either supply increases to meet the demand, or the demand itself starts to disappear because of the high prices.

Treasury Inflation Protected Securities (TIPS)

If you’re mostly interested in preserving the value of your investments, or at least the bond/cash allocation, Treasury Inflation Protected Securities, or TIPS, may protect that part of your portfolio during a time of rising prices.

TIPS are US Treasury Securities, issued by the US Treasury Department. That makes them among the safest investments available.

But what makes them even more attractive during a time of rising inflation is the combination of interest yield and inflation-adjusted principal increases they offer.

Not only will you earn interest on your TIPS, but the securities feature periodic increases in the principal balance based on increases in the Consumer Price Index (CPI). That means you’re assured your investment principal will be protected from inflation, while you’re also earning interest. It’s a feature not offered by other interest-bearing investments, like certificates of deposit or high interest savings accounts.

TIPS can be purchased directly through the US Treasury Department’s investment portal, Treasury Direct. There, you can purchase securities in the minimum denominations of $100, and in terms of five-, 10- and 30-years.

One thing to be aware of, however, is that principal additions to your investment are taxable in the year they are made. That will least partially reduce the inflation protection offered by these securities.

TIPS won’t provide the spectacular returns you’ll get from stocks, commercial real estate, or commodities, but they will offer some inflation protection to the fixed income side of your portfolio.

Bottom Line

If you’re like most investors, you’re already positioned to deal with inflation in the best possible way, with a combination of owning your own home and investing in stocks. Both have performed extremely well over a human lifetime, even in the face of relentless inflation.

But if you want to increase your inflation protection, diversify into commercial real estate and stocks that invest in commodities likely to benefit from rising prices. You can take advantage of either asset class with as little as a few hundred dollars. The inflation protection you’ll get from those investments will be covered many times over.

And if you want to add some protection to the fixed asset side of your portfolio, take a close look at TIPS. They’re not suitable for funds that need to be liquid, like an emergency fund, but they can add some inflation protection to the bond side of your portfolio.

The right mix of asset classes will keep you fully protected from inflation, at least over the very long-term. And when it comes to investing, the long-term is really all that matters.

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inflation
Article written by Kevin Mercadante
Kevin Mercadante is a freelance professional web content writer for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has extensive backgrounds in both accounting and the mortgage industry. In fact, it was his career crash-and-burn from the mortgage business in 2008 that led him into blogging and freelance professional web content writing. Kevin and his family live in New Hampshire, after long stints in New Jersey and Georgia.

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