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How to Survive Inflation: 3 Successful Investors Weigh In

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Inflation is here. How can you protect your holdings?

If you've been paying attention to markets and financial news lately, there's a chance you might be feeling a bit spooked. "Inflation" seems to be the word of the day, and the U.S. dollar's declining purchasing power doesn't appear to be some far-off threat or hypothetical. As Berkshire Hathaway CEO Warren Buffett stated in the company's most recent shareholder meeting: "We are seeing substantial inflation. We are raising prices. People are raising prices to us, and it's being accepted." 

Significant inflationary pressure is here, and you may have already seen prices rise for a variety of goods. What comes next is less clear, so we put together a panel of three Motley Fool contributors and asked them to shed some light on the situation and how they're approaching it. Read on for their thoughts on surviving inflation. 

A hundred-dollar bill on fire.

Image source: Getty Images.

Consider the classic safe havens, but stay flexible

Keith NoonanRapid inflation is a worrying prospect. If you've worked hard to save money, the threat of its purchasing power being quickly diminished probably hits like a kick in the gut. Staring down that threat, there's a natural impulse to get into safe assets -- and get into them as quickly as possible. At the same time, it's important to survey the situation as it currently is and not make the assumption that previously successful strategies will be completely reliable this go around.

The U.S. Federal Reserve Bank and other central banks around the world have printed a record amount of new money in order to mediate economic pressures created by the coronavirus pandemic. Now, many economies are beginning to reopen. That's leading to increased money circulation, but supply chain issues and other fiscal policy initiatives are also at play. The combination of dynamics is leading to pricing increases for commodities, manufacturing, and even parts of the service economy. Charting equity and asset prices is messy business right now, to put it mildly. 

Inflation is inflation, but the factors driving the phenomena are unique to this point in time, and there's an incredible array of variables for investors to consider. The sentiment may sound repetitive and trite at this point, but it's still fair to say we're living through an unprecedented situation.

High-quality stocks, precious metals including gold and silver, and real estate have traditionally been good safeguards against inflationary pressures. Each of these categories comes with its own unique set of benefits and risk factors, and investors should proceed with the understanding that there's no sure-fire answer to the inflation question with so much uncertainty on the horizon. While the real estate market is already red hot and some analysts have raised reasonable concerns about a potential housing bubble, buying property is currently what I'm looking closest at. 

Significant inflation appears to be taking place and could worsen, but I also have to confess that I'm keeping a substantial portion of my holdings in cash right now. I expect that will change by the end of the year, but for the time being, I'm comfortable waiting for more information to come in with the hope it provides more clarity about the best path forward. 

The inflation risk isn't necessarily global

James Brumley: One thing U.S. investors should bear in mind is, the inflation they're worried about is a loss of the U.S. dollar's buying power. That doesn't necessarily mean other countries' currencies will follow suit and disrupt their consumer-driven economies as a result.

No country operates in an economic silo anymore, of course. But not even the world's biggest trade dependencies are as big as you might think. China's best overseas market is the U.S., but we still only buy between 15% and 20% of its total exports. Other countries and regions buy considerably less.

My point is, if you're afraid domestic inflation is brewing, adding international exposure to your portfolio helps offset that risk. Something like the Vanguard FTSE All-World ex-US ETF (VEU -1.44%) could do the trick nicely. And if that's not quite esoteric enough for you, think about countries that are well separated from U.S. dollars, or regions that are growing so briskly that a weak U.S. dollar isn't a problem. That puts exchange-traded funds like the iShares MSCI Frontier 100 ETF (FM -2.30%) or the SPDR S&P Emerging Markets Small Cap ETF (EWX -0.99%) in focus.

These funds can't completely shield you from the inflationary forces manifesting within the U.S., to be clear. But they can certainly offer a fair degree of protection from them without getting you altogether out of the market.

Keep a level head

David Butler: Inflation isn't something brand new. It happens through time as the money supply increases. Yes, hyperinflation is BAD, but we're not that far down the rabbit hole. Where you really lose, is if your wealth is predominantly in cash. The weakening value of a dollar damages your spending power.

In a way, we've already seen some impacts of the massive government spending measures taking place, as well as low interest rates. The stock market is trading at all-time highs, with huge premiums on a number of the best-performing equities. The housing market has been on fire, with home values rising 12% in February alone.

It's probably a little late to be venturing into super expensive growth stocks that are trading at 80 times earnings. It's also not the time to try to buy expensive homes. Prices have already run. Sure, there could be further upside, but if the Fed is forced to move on interest rates in order to curtail inflation, those areas have downside potential.

If you want stocks, you want to look for good valuable investments in companies that are going to continue thriving in their respective industries, regardless of inflation. Look for businesses that people need, regardless of price. Bank stocks continue to offer better value than many industries, and they technically stand to benefit from rate increases, as it will improve profitability on loan portfolios.

Another area I like is chip suppliers. We're witnessing a national shortage of chips. That stands to inherently drive up the value of supply. These days, smartphones, cars, and computers all need those little bits of metal and plastic. Manufacturers don't have much choice in terms of whether to purchase them or not, regardless of pricing. That means that the increase in material costs for the chip manufacturers can be put onto the companies buying their goods. Off the top of my head, I say keep it simple and buy NVIDIA (NVDA -4.82%).

Perhaps another option to consider would be taking some profits to reallocate to inflation-friendly areas. I know that sounds a bit contradictory to what I said before about being in cash, but the 42% run in the S&P 500 over the last two years is more than enough to offset inflation. It frees investors up to prepare and see what's next.

Outside of equities, commodities stand to benefit from higher inflation as prices rise. Commodity ETFs can be a good avenue for such things. Just be careful to avoid anything leveraged.

In the end, just remember that inflation won't be the end of the world. You don't need to panic and put everything under the mattress.

David Butler has no position in any of the stocks mentioned. James Brumley has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA. The Motley Fool has a disclosure policy.

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Stocks Mentioned

NVIDIA Corporation Stock Quote
NVIDIA Corporation
$178.69 (-4.82%) $-9.04
SPDR Index Shares Funds - SPDR S&P Emerging Markets Small Cap ETF Stock Quote
SPDR Index Shares Funds - SPDR S&P Emerging Markets Small Cap ETF
$50.23 (-0.99%) $0.50
iShares, Inc. - iShares MSCI Frontier 100 ETF Stock Quote
iShares, Inc. - iShares MSCI Frontier 100 ETF
$27.50 (-2.30%) $0.65
Vanguard International Equity Index Funds - Vanguard FTSE All-World ex-US ETF Stock Quote
Vanguard International Equity Index Funds - Vanguard FTSE All-World ex-US ETF
$51.12 (-1.44%) $0.74

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