How to Protect Your Money From Inflation in 2021
Cyclists and investors finally have something to talk about: inflation.
Dad jokes aside, inflation is dominating headlines in the U.S. Consumer prices rose 5.4% in July, the highest rate since the Great Recession. While a small rise isn’t a bad thing, sustained inflation is an ominous sign for investors.
Fortunately, there are ways to combat inflation. Here’s what you need to know to protect your money and purchasing power.
Why inflation matters
Most economists believe low, stable and — most important — consistent inflation can benefit the economy. That’s why the Federal Reserve aims for a 2% annual inflation rate. The logic is that this is a happy medium for maximum employment and price stability.
Of course, inflation can be too high or too low. When inflation is too high, it places a burden on consumers. People have a harder time buying essential goods and services, like food, gasoline and shelter. When inflation is too low, it can weaken the economy.
In a perfect world, the Federal Reserve would hit a 2% inflation rate, and the economy would remain stable. The problem is that we don’t live in a perfect world. The coronavirus alone has made the last 1.5 years wildly unpredictable.
One antidote to the pandemic has been economic stimulus packages. Meaning, the Federal Reserve printed more money. In January 2020, the M2 money supply was $15.41 trillion. In April 2021, it was $20.11 trillion. That’s a 30% increase in the money supply. It also means a decrease in your purchasing power.
The problem with a 60/40 stock/bond portfolio
If you’re like most people, you probably have a significant chunk of your investments in traditional assets. We’re talking stocks, bonds, equity shares and cash. (The jury is still out on whether real estate is a traditional asset).
Here’s the problem: Even if you have a diversified portfolio, all these investments are vulnerable to inflation. It’s the single point of failure. According to Forbes, a classic 60/40 stock/bond portfolio would “get hit from both sides” when consumer prices, stocks and bonds prices drop. While this type of portfolio historically returns 9% per year, that figure drops to 2% during periods with high inflation.
How to invest if inflation surges
We’ve reached the million-dollar question: How do I protect my money when inflation rises? You have a couple of options. First, you can stay the course. High inflation usually doesn’t last more than a year. While your portfolio might take a short-term hit, you can make up the losses over time.
Second, you can invest in inflation-resistant assets. Historically, gold has been the go-to hedge against inflation. Between 1971 and 2019, it has had a more than respectable 10.61% return on investment.
While gold may have been your grandpa’s only inflation-resistant investment option, we've come a long way since then. Modern investors can put their money in blue-chip art, fine wine, collectibles, cryptocurrency, stamps, cars and jewelry, just to name a few. The only limits are in the imagination.
Why alternative assets thrive during inflation
Alternative assets tend to have lower volatility than their traditional counterparts. That’s because the market forces that impact stocks and bonds don’t necessarily apply to fine art and fine wine. This makes alternative assets less vulnerable to short-term spikes in inflation.
Take Monet paintings, for instance, which can sell for more than $100 million. These paintings have an inherent supply and demand imbalance. Monet died in 1926, so the number of paintings is fixed. (Technically, the supply may go down as a result of theft, degradation or other damage).
Contrast this scarcity with the ever-growing demand for Monet’s artwork. The value of his paintings should continue to rise, regardless of what happens in the traditional markets. In fact, high inflation may be beneficial. According to the New York Times, “history does show that art prices rise during inflationary periods. The Art 100 Index, compiled by Art Market Research, shot up 130 percent from 1977 to 1982, a period in which prices rose 80 percent.”
Where to invest in alternative assets
If you've made it this far, you probably think it's a good idea to invest in alternative assets. I do too. That's why I've made a shortlist of some of the top places to buy and sell alternative assets.
- Masterworks, a fine-art investment platform with masterpieces from artists like Banksy, Warhol, and Calder.
- Vinovest, a wine investing platform that provides access to the world’s most exclusive wines.
- Stock X, an online marketplace dedicated to buying and selling streetwear, sneakers and trading cards.
- Coinbase, the largest cryptocurrency exchange with more than 68 million users.
Alternative assets provide a range of ways to grow your wealth. Whether you invest in baseball cards or fine wine, you can earn a consistent return on investment while increasing portfolio diversity. Most importantly, alternative assets offer a hedge against inflation.
Maybe cyclists and investors don’t have as much to talk about as we originally thought.