Look at Investment Opportunities with an Eye to Inflation

When you are looking at the many different investment options that you have, there are several factors that you will want to consider. One of the most important things to look at is inflation. Here are a few things to consider about how inflation can impact your investments.

Impact of Inflation

Anytime that you are selecting an investment, you need to pay special attention to the impact of inflation. Inflation can severely limit the potential of an investment. As an investor, you want to be able to stay ahead of inflation with your returns. For example, if you invested in something that provided you with 3% return, you may not actually be making any money. The average increase of inflation is about 3%. Therefore, you need to do better than that in order to actually be making any money.

Investments that Favor High Inflation

Even though inflation can wreak havoc on the returns of certain investments, other investments actually benefit from high inflation. For example, if you invest in the Forex market, you can take advantage of inflation directly. By investing in the Forex market, you can trade currency pairs. This will allow you to purchase a currency that is increasing in value in comparison to the dollar. This is the most direct way to benefit from a weak dollar.

Another way that you can benefit from high inflation is to invest in precious metals. Precious metals such as gold and silver tend it to increase in value when the value of the dollar falls. These metals tend to be quoted in dollars regardless of what country you are in. Therefore, the value of the dollar tends to impact the value of the metal. 

You could also invest in companies that export a large percentage of their goods to other countries. By doing this, you can benefit from the fluctuations in the exchange rate without actually having to invest in a foreign company.

Investments that Favor Low Inflation

There are many investments that do better when inflation is low. For example, you are going to be able to get better returns from domestic stocks when inflation is low. Domestic companies typically do a majority of their business in the United States. Therefore, you want the economy to be strong in order to improve the chances for the company. Domestic bonds also tend to do better when inflation is low.

Inflation-Adjusted Securities

Something else that you might want to consider is investing a portion of your portfolio into inflation-adjusted securities. There are certain types of government bonds that are going to adjust their rate of return to equal the amount of inflation. For example, the I bond is a type of savings bond that pays you a small rate of interest and another payment that is equal to the percentage change in the Consumer Price Index over the last 6 months. This allows you to invest in something that is actually going allow you to keep up with inflation. Even though these can be attractive, you do not want to put a large percentage of your portfolio into these securities. Ideally, you would like to do better than the inflation rate than to simply track it. 

blog comments powered by Disqus
Scottrade