Inflation Investments – Is now the time?

One of the biggest economic stories in 2022 is the continued rise in inflation.

Many people are rightly upset about the value of their money being degraded by inflation. Many folks are wondering if they should be making changes to their investments to offset the impact of inflation. Let’s review a few of the more well-known inflation investments options available to investors:

1. Series I Savings Bonds (I-bonds). I-bonds are a wonderful way to protect against short-term inflation, despite some limitations. Their interest rates change every 6 months based on prior inflation. As of April 2022, I-bonds’ interest rate for the first 6 months is 3.56% due to high inflation. This will fluctuate every 6 months as changes in inflation happen. State taxes are not owed on I-bond interest, and you can defer federal taxes on the income until you sell the I-bonds. The largest drawbacks to I-bonds are individuals can only invest $10,000 per year into I-bonds ($15,000 total if you have a $5,000 tax refund), I-bonds cannot be purchased within retirement accounts, I-bonds cannot be sold within the first 12 months of purchasing them, and I-bonds sold within the first 5 years will get penalized 3 months of interest. If you have spare cash lying around, and don’t need it in the next 13 months, I-bonds could be a great option to protect some of your money from inflation. To purchase I-bonds, you must buy them directly through the Treasury at https://www.treasurydirect.gov.
2. Gold. Many people (especially those who sell gold) talk about how gold maintains its value against inflation. While this is true some of the time, it isn’t true all of the time. Gold has wild price swings far in excess of inflation. The price of gold doesn’t track the rate of inflation, so investors who use this as an inflation hedge take substantial risks for a hope that a spike in the price of gold will correspond with an increase in inflation. Many times, this doesn’t work out, and gold doesn’t maintain its value during the inflationary time. Gold isn’t a productive asset (outside of a few industrial uses), it is a piece of metal that people buy hoping other people will pay more money for it in the future.
3. Treasury Inflation Protected Securities (TIPS). TIPS are offered by the US government, and guarantee that the investor’s principal will rise in line with the rate of inflation as defined by the Consumer Price Index. Depending on interest rates, TIPS may offer additional interest above the inflation rate. TIPS do a wonderful job tracking the overall rate of inflation in the US. Many individuals are thinking about buying TIPS currently, but since TIPS’ return is largely based on future inflation, TIPS are valued based on investor’s expectations for future inflation. Investors have already priced TIPS based on expected increased inflation in the future, and therefore if you purchase now you are betting that investors have underestimated future inflation. To do this, you would need to believe you have an information edge that will help you more accurately predict inflation than the professional investment universe. While TIPS are a great investment to protect against inflation, buying TIPS now may be “buying high.”
4. Diversified Stock Investments. Owning a diversified group of stocks has historically generated returns above inflation. Companies generally have pricing power to at least keep up with inflation, and often times exceed inflation because they sell valuable products and services. While US stocks are excellent at protecting investor’s money from inflation over the long-term (10+ years), they are not well-suited for short-term inflation protection.

During times of economic stress, it can be tempting to make changes to your investments to feel like you are taking control of the situation. Feeling a loss of wealth can be similar to straining a muscle. However, we know that when we hurt ourselves, the best course for healing is rest. You may want to eventually rehab the injury, and take action to prevent future injury, but once your back goes out, inaction is often the best action. A well-constructed, diversified investment portfolio is similar, reacting to changes in the economic environment often times leads to worse results than just being patient with your current investments.