3 Ways To Protect Your Investments From Inflation

Inflation is now at the highest level it’s been in 31 years in the United States.
German inflation is at its highest level in 13 years.
Inflation in Poland is at its highest level since 2001.
Canada, France, Egypt, the Philippines, and most countries on Earth right now are dealing with the worst inflation they’ve seen in years or decades.
This is leading to higher energy, food, commodity, and transportation prices… Which is leading to higher prices for everyday products like gas, toilet paper, peanut butter, paper towels, and more.
And this means we all are making less now than we were this time last year in a real-world sense.
How?
Let’s use the U.S. as an example.
Inflation right now is at 5.4%… Meaning compared to this time last year, in general things like those mentioned above are 5.4% more expensive on average.
Meaning we must spend 5.4% more now than this time last year to buy the same things.
And while wages are rising at about that same rate in the U.S. – that only means we are back to earning in a real-world sense what we were this time last year.
This is one of the reasons inflation is called the “invisible tax.
Because unless it rises fast like its doing now – it’s almost impossible to see an effect on your everyday life.
When was the last time you noticed a 1 cent rise on your kid’s favorite cereal?
You probably didn’t.
But I bet you noticed when cereal prices jumped earlier this year.
Same thing with meat prices at the grocery store too. I bet you noticed those large price rises the last time you wanted to cook a meal at home.
Inflation is also a huge reason housing prices are skyrocketing nationwide right now too.
Because many of the components that go into building a house – steel, lumber, copper, etc. – are all going up in price fast.
Small and slow rises over time we don’t notice.
But we do when they are big leaps in a short amount of time.
This is why people are so worried about inflation right now.
We’ll get into exactly why inflation is rising fast in most locations worldwide in another post… But today, I want to show you 3 Ways To Protect Your Investments From Inflation.
Before I get to that though, I need to show you how inflation crushes investments over time.

How Inflation Crushes Investments

All else remaining equal, with inflation at 5.4% in the U.S. if your investments aren’t earning at least that amount you’re losing money.
Why?
Because inflation erodes the value of your cash, assets, and investments. As of this writing, at a rate of 5.4%.
Plus, you need to add in fees, transaction costs, and taxes. This puts investment expenses in the range of 8% to 10% every year.
Meaning if you’re not earning at least 8% to 10% returns every year you’re losing money due to the things above.
And as inflation goes higher this number goes higher too.
Another way to think about this… Let’s say the above costs add up to 10% on every investment you make.
This means just to earn a 1% profit on your money every year, you must earn 11% investment returns.
It may not sound too hard to beat the market and earn 11% investment returns on average… But it is.
Over the last 120 years or so the stock market in the U.S. returns on average about 10% per year.
And according to a study done by authors Larry Swedroe and Andrew Berkin, only 8% of professional investors beat the market over the 15 years leading up to 2020.
In other words, investing is already hard… But with inflation rising its now even harder because you need to earn even higher investment returns.
How can you do that?

3 Ways To Protect Your Investments From Inflation

NOTE – The following stock examples are just that… Examples. These are not investment recommendations. I do not own stock in any of the companies mentioned below. And you should do your own research before buying any investments.
However, these – and companies with similar traits – are good places to begin your research for the reasons detailed below.
The following three things are ways to protect your investment portfolio from the hidden – but real – tax of inflation.
They are in no order. And you should consider all three.
1. Dividend Paying Stocks 
The first way to protect your portfolio from the ravages of high inflation is through investing in dividend paying stocks.
Let’s say you own Altria (MO) stock.
Right now, it pays a 7.2% dividend due to its enormous cash flows and competitive advantages.
Just by owning this stock you’re already beating the 5.4% inflation in the U.S.
Plus, you own a safe investment that has upside and huge competitive advantages that will allow it to be around for decades.
One word of warning though… Generally, if a stock has a dividend yield higher than 5% that’s a red flag the company may have issues.
While this explanation goes outside the scope of this post, be wary of companies with higher than 5% dividend yields. And make sure they produce consistently high enough cash flows from operations to sustain the dividend.
If they don’t, they may have to issue shares, debt, or both to continue the dividend which is not best.
Altria is an exception to this rule because of its massive consistent free cash flow production.
Don’t invest in high dividend stocks only to invest in their high dividends.
Because if they can’t sustain the dividend with cash flow from operations, they will likely have to cut the dividend at some point.
This not only defeats the purpose of investing in dividend stocks to protect your portfolio from inflation.
But this will also crush the stock price of the investment as well.
Another reason to consider investing in Altria is for two further reasons…
It can raise prices without losing customers to keep up with rises in inflation. And people will continue using its products no matter what the economic situation is.
This makes it much like a consumer staple stock…
2. Consumer Staples 
These are companies that make things we use or eat every day…
Two examples of these companies are…
  • Kimberly Clark (KMB) - it makes and sells toilet paper, paper towels, diapers, facemasks, Kleenex, feminine care products, and more.
  • General Mills (GIS) - Cheerios’s cereal, Yoplait yogurt, Betty Crocker desserts, Pillsbury baking products, Lucky Charms cereal, Hamburger Helper meals, Green Giant Vegetables, Blue Buffalo pet products, and more.
These companies are great to fight inflation for 3 main reasons.
  • People worldwide will continue using these products no matter the economic situation.
Why?
In dire economic situations people may stop paying their mortgages, they may stop paying their car payments, but they won’t stop feeding their kids and their pets.
  • These companies can raise their prices as needed to fight inflation - without losing customers.
This means their revenues, profits, and cash flows can stay stable or sometimes even grow during inflationary times.
  • They generally pay dividends as well due to their long-term competitive advantages and cash flow production.
See the reasons above for why this is important.
As one example, Kimberly Clark pays a 3.26% dividend as of this writing. And it raised prices earlier this year on several of its products like Scott’s toilet paper, Huggies diapers, and more to fight the initial effects of inflation.
This dividend combined with the price increases on its products will help your portfolio fight inflation.
The price increases keep margins high and may even grow profits and cash flows in some cases.
This offers enormous safety to you as an investor because it allows the company to continue growing. While also keeping or increasing the dividend it pays you.
3. Value Investing
Value investing… Why is value investing on this list?
Because as inflation rises, historically people move out of things like growth stocks into value stocks.
Why?
Because growth stock investment returns are based on the future expectations of large cash flow production. Not what’s happening now.
This is why you see many growth stocks with years of unprofitability before they earn positive profits.
Think Uber and Tesla as two examples.
But if inflation is high, the future value of cash flow drops as illustrated above.
Value stocks are valued based on the assets and cash flows they produce now. Plus, when value investing properly, you’re buying undervalued cash flows and assets.
Money and assets companies produce right now are worth more than money in the future… Especially with inflation rates high and still rising as of this writing.
How?

Because another way to think about inflation that I didn’t mention above is that it makes every dollar you have now, worthless over time.

Here’s an illustration of that when it comes to the value of the U.S. Dollar.
What this shows is that a U.S. Dollar from 1913 has lost 99% of its value compared to a U.S. Dollar in 2019.
This illustrates the long-term effects of inflation… Even at small rates. Higher rates of inflation accelerate that as you can see from the periods after World War 2 and during the 1970’s Stagflation era.
But, by buying undervalued cash flows and assets you’re stemming the effects of inflation because they hold more value now.
This is how it protects your portfolio from inflation.

Conclusion

The 3 things I’ve shown you to consider investing in above – dividends, consumer staples, and value investing – will help protect your portfolio from the ravages of inflation.
And you can and should combine these things together as well…
For example, if you find a great undervalued consumer staple that pays a dividend… Even better.
How can you do that?
If you’re interested in learning how to do this make sure to check out our newly relaunched Value Investing Masterclass.
In this program you’ll learn how to find, value, and evaluate great stocks fast… From someone – me – who has beaten the market by a wide margin in the first 9 years of my career using value investing principles.
All without high end math, complex DCF calculations, fancy Excel spreadsheets.
In as little as one hour a day.
And for the firsts 10 people to sign up you’ll also get a FREE bonus that my team and I will sell next year for $5,000.
Always in your service,
Jason
P.S. I didn’t talk about Treasury Inflation Protected Securities or TIPS here because while they do go up in value when inflation goes up… I’ve never personally invested in them due to their historically poor returns.
However, if we see long term sustained inflation that continues rising you may want to consider investing in a TIPS ETF as a hedge against out-of-control inflation.

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