How to Beat Inflation: Protect Your Portfolio

Last updated March 20th, 2024.

A metaphorically infinite number of dollars are chasing a limited number of goods. The result? Inflation!

There’s no ignoring the elephant in the room – it’s gotten so large that there’s barely any space left. Open any financial newspaper and chances are you’ll see some article about high inflation on the front page.

Inflation isn’t exactly a novel topic at this point, and we almost didn’t write about it.

Investors with poor timing, and those who overleveraged themselves over the past few years, have scrambled for the exits.

Yet on the other hand, there’s an opportunity for the patient.

In this article, we will discuss the best ways to beat inflation, why we’re in an era of rising prices, and how to position your assets appropriately.

Why The Inflationary Mess?

For years, the more conspiratorially minded economists have whispered about the possibility of inflation.

They posited that the money creation to stimulate the economy as a means of solving the Great Recession would be unsustainable, despite the fact that it had created the longest bull-run in history.

Quantitative Easing, as the program came to be known, uses newly created money to purchase debt, thereby artificially propping up the economy with low-interest rates.

While controversial at first, QE is now the norm in most western countries, and it’s been argued that this has disrupted the natural ebb and flow of the markets.

It’s difficult to fully describe the extent to which this has affected the economy. Just in the United States, about US$60 billion in bonds are purchased per month through this means.

Over the last decade, the economy seemed to expand to support these new inflows and inflation rates were negligible.

Low inflation rates also created the Silicon Valley culture of businesses with no clear path to profitability. They’re supported by investors in the hopes that one day these startups might capture large enough chunks of the market to become a practical monopoly.

Now, with the supply shocks and shift in consumer behavior towards the cautious side, investors are terrified. The era of easy growth and supporting unprofitable business models is over.

It’s clear many of these businesses will never become profitable and so investors are fleeing.

So then, where are you supposed to invest in an inflationary environment?

Here’s a chart showing US inflation rates over the past 70 years. 5% isn’t terribly high by historical standards. Note that buying stocks and real estate were the best ways to beat inflation over the last century.

Best Investments to Beat Inflation

If we were to make a list of the best performing investments during an era of high inflation, they would often have the following characteristics:

1. Scarce – Difficult to create or limited in number. This is pretty self-explanatory, if you have an infinite amount of dollars chasing an asset that is rare, the price has nowhere to go but up, thereby matching or even beating inflation.
2. Necessary/Desirable –  In economic terms, what we’re looking for is some asset that is price inelastic. As in, an asset with such strong demand that changes in price do not affect people’s willingness to buy it.
3. Geographically separated from the money printer – If there’s severe inflation happening in one country, if you invest elsewhere that doesn’t have strong economic ties with the original nation, then you can sidestep most of the effects of inflation.

Once we consider these three aspects, it’s easy to understand why certain assets are often mentioned when people talk about inflation.

Cryptocurrency

It’s said that crypto is a solid hedge against inflation. Indeed, cryptocurrencies like Bitcoin and Ether have done remarkably well over the last decade when compared to a US dollar denominated savings account.

As a relatively new asset class, there isn’t a long-term precedent for Bitcoin’s performance in an inflationary environment though.

Holding bitcoin during periods of high inflation might work out. We put it on this list for a reason. Still, it’s less tested compared to other investments on the list.

The fact that crypto coins are limited in number doesn’t necessarily guarantee perpetual upwards trajectory either. 

We simply haven’t seen what happens to Bitcoin and other crypto in a prolonged global market downturn. That said, the initial results look good.

There’s no such thing as a “global inflation rate” and it varies depending on the country. For example, the inflation rate in Thailand is currently negative.

Commodities/Stocks

In economic history, there has usually been a constant: sooner or later, gold will match the pace of inflation. The price of gold might be up, or it might go down, but over a long enough time span, its value keeps in line with inflation.

The same can’t be said about many other commodities. For example, aluminum used to be considered an expensive luxury, to the point that aristocrats would showcase their aluminum cutlery in banquets.

Yet, the new production methods of the industrial revolution made it so cheap that we now wrap sandwiches in it.

More broadly though, commodity producers via publicly traded stocks tend to be better assets to beat inflation. For example, don’t invest in gold. Instead, consider buying shares in gold mining companies.

With regards to beating inflation, it might work for the best. Their labor costs is mostly fixed, but the price of their goods is constantly going up.

As such, perversely, their profit margins might increase when there’s high inflation. So, you can benefit from the soaring prices of commodities, while still having a cash-flow-producing asset.

Property

Real Estate and land tend to do rather well in inflationary periods, or at the very least keep in line with inflation.

There are many ways to do this. You can buy property directly, though that might carry with it some administrative obligations, like taxes and other surcharges.

Besides that, there’s always the option of investing in property via REITs, which pool investor funds to purchase dozens or hundreds of properties. As such, you can be very well diversified but still have a property-centric outlook.

It’s worth mentioning that REITs and property funds are generally quite good from a cash flow standpoint, as they pay most of their profit as dividends.

Whichever option you choose though, bear in mind that you’re not chained to the country that you’re currently residing in.

For example, Cambodia completely sidestepped the 2008 Great Recession. If you were deriving income from Cambodian property, you wouldn’t have felt it.

Asia is often countercyclical to Western economic policies. Global assets, depending on where you’re buying, can be great places to beat inflation.

Generally speaking, these are the broad asset classes that people tend to recommend in inflationary environments. None of them is devoid of problems, but some are objectively better than others.

However, now that we’ve looked at where you can preserve your wealth, let’s look at how the financial scene changes when there is high inflation.

How Do Economies Peform During Inflation?

If we look at the historical record, high inflation often leads to economic collapse. It’s easy to see why, as high inflation is a sign that people have lost trust in the underlying value of their currency.

This, by extension, means that people lose faith in everything associated with it, including perfectly good companies and assets.

When things get bad enough, people want to flee, and they’ll sell to whoever will take their investments off their hands, even if it’s at ridiculously low prices. It’s important not to lose one’s head along with the crowd during the period of collapse.

Don’t sell in a panic, this is normal. But once this happens, you’ll have to stay put for a few years. It’s happened before.

Way back in 1922, during the era of hyperinflation in Weimar Germany, there was a case where an automobile factory in perfect order cost less than the price of 227 cars they’d previously produced. By 1927, this price quadrupled from its lows.

The trick in high inflationary environments is to prepare beforehand and commit to a course of action, don’t pussyfoot around. Lack of confidence at any point may destroy you in the long term by realizing losses or having your capital eaten away by inflation.

It bears mentioning though that it is possible to use inflation to your advantage. If you have fixed-rate debt, as in loans that can’t adjust their interest rates to match inflation, then you’re in luck.

In real terms, you might end up paying far less than what the original loan was earmarked for.

How to Beat Inflation

Contrary to what the politicians have been saying, inflation is not transitory and at least for the foreseeable future, it’s here to stay.

It’s unclear how it will ultimately express itself, but there are some steps that you can take today to protect yourself from the ravages of high inflation. Generally speaking, don’t try to chase the dragon of high earnings.

In volatile times, it pays to be more conservative and go with less speculative investments. Money-makers of previous eras, like tech stocks, are reliant on a world of low-interest rates – a world that is rapidly coming to an end.

If you want to thrive, then you must be adaptable but confident enough to follow your plans without being spooked when there is volatility in the markets.

To summarize, here’s how to beat inflation:

Put your money into scarce assets that’ll be desirable regardless the future, and are located away from the impacted area.

No single investment strategy is foolproof, but as far as outperforming inflation goes, it’s the best we’ll ever get.