Six Inflation-Proof Investments Your Portfolio Needs

Like death and taxes, inflation is one of life's few certainties. With smart investment choices, however, you can hedge against or even profit from the never-ending increase in product prices over time. While inflation itself is a constant, the rate at which prices rise varies depending on the cost of labor, raw materials and other factors. These are my top picks for those who want to build an inflation-proof portfolio. 

Gold

Have you heard of the "gold standard"? Gold has long ranked as the ideal investment for inflation-shy buyers because raw material tends to hold its value regardless of economic conditions. Before you stock your closet with gold bullions, however, keep in mind that interest rates tend to keep pace with inflation. As a result, you'll receive limited yields from gold when inflation rates go up. Investors can either buy physical gold or buy shares in an exchange-traded fund that moves in tandem with the value of gold. 

Real Estate

Because real estate investments double as consumer products, their value rises with inflation. In fact, federal statistics show that home price increases have steadily outpaced inflation growth over the past three decades. 

As you hold property and allow it to appreciate, you can also collect income from short-term or long-term renters. Rent prices also increase in times of high inflation. If you aren't interested in directly buying residential and commercial investment property, consider buying shares in a real estate investment trust. Simply put, REITs are private or public funds that invest in real estate. 

Treasury Inflation-Protected Securities

Inflation-proof is basically right in the name of these government-backed bonds, commonly called TIPS. The value of TIPS rises and falls in concert with inflation, which means they pay off in difficult economic times. Experts recommend using these safe securities to balance a portfolio heavy on bonds. You'll receive twice-yearly interest and can choose from five, 10 or 30-year terms. At maturity, TIPS pay out the greater of your original investment or the bond's current value.

Commodities

If you don't mind the risk associated with commodities, investing in this category provides a powerful antidote to inflation. Commodities include a wide variety of consumer goods such as gas, soybeans, cotton, orange juice, beef, oil, utilities, precious metals and emissions as well as foreign currency. While the prices of these goods tend to rise with inflation, they can also be quite volatile.

Use caution and seek professional advice if you aren't a seasoned investor. You can also invest in commodities through a mutual fund or ETF, often available in 401(k) and other employer-sponsored retirement plans. 

Cash

Keeping a healthy amount of cash in a money market account, certificate of deposit or high-yield savings account can provide liquidity in an uncertain economic landscape. In addition, cash traditionally stands up to inflation, especially when short-term interest rates also go up. However, CDs and other cash accounts provide a low return compared to securities. Most experts recommend keeping no more than six to nine months of household expenses in liquid cash. 

Growth Stocks

Focus on securities that rise along with inflation. Examples of industries to consider include tech, construction materials, energy, health care and food. Logically, it makes the most sense to invest in sectors that will continue to thrive in times of economic slowdown, which primarily includes these and other essential services. 

In June, the Federal Reserve reported an inflation rate increase of 3.6% from April 2020 to April 2021, the highest such rise since the Great Recession of 2007 to 2009. Now is the ideal time to diversify your portfolio to cushion the blow of these rising prices.