Inflation puts investors in a tough spot. It's hard to hold on to cash when it's losing its purchasing power, but when the primary alternatives are either bonds that aren't earning much more than cash or a stock market with stretched valuations, it may seem like there are few reasonable choices.
Fortunately, not every investment reacts the same way when inflation comes roaring along. Some have ways to potentially protect themselves and their owners from the ravages of inflation. We asked three seasoned Motley Fool contributors what they're willing to invest in despite the inflation we're facing. They picked Apple (AAPL 0.01%), SPDR Gold Trust (GLD 0.33%), and Prudential Financial (PRU -1.69%). Read on to find out why and decide for yourself whether any of them could be worth your cash.
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A tech titan that has learned how to diversify its revenue stream
Eric Volkman (Apple): As inflation was starting to rear its ugly head during the pandemic, I finally pulled the trigger on Apple after years of twiddling my thumbs and only considering it. I'm glad I bought; even in the relatively short span of time since I bought it, the stock has done better than many of its tech industry peers.
I'm also very comfortable holding on to it if and when inflation swells. Yes, consumers tend to cut back on discretionary spending when a currency inflates, however, Apple's goods and services are resilient. They're fun to use and have cache and coolness, and even in a challenging economic environment people will find a way to pay for them.
In fact, Apple's been banking on this since rolling out the iPhone in 2007; in all the years the phone has been on the market, it has never been the cheapest option. It's grabbed and held significant market share -- securely in the low double digits lately -- despite the relatively high price tags of its higher-end models.
Happily, Apple isn't dependent on sales of attractive hardware. The company has also done a fine job of lifting revenue from an ever-growing number of services associated with its products. In the two-year span from the fourth quarter of fiscal 2019 to the same quarter two years later, net sales from services shot 46% higher to comprise nearly one-quarter of the company's total. That tally for products advanced by 26%, meanwhile.
What's particularly heartening about this dynamic is that Apple is a master of coming up with new services.
Not all of them land with consumers, but the best ones are real hits. Who wouldn't, for example, want to pony up a few extra bucks for AppleCare to protect those valuable iDevices, even with inflation eating away at their dollar bills? The company's ecosystem is constantly expanding, and it's obviously got its eyes open for opportunities to plug functionalities into it.
Winning products, of course, take a longer time to develop, test, and bring to market. But I feel that with its vast expertise in so many areas of tech and its great eye for opportunity, Apple can expand its hardware universe effectively, too. It's still relatively early days for the M1 line of computer chips, for example, but the reviews are very good, and they have real potential to disrupt that large and lucrative tech segment.
Inflation is an annoying pest that can chew away at the more vulnerable investments. I think Apple is extremely resistant, very resilient, and will do just fine as an investment in the face of such a threat.
A classic play against inflation's toll
Barbara Eisner Bayer (SPDR Gold Trust): I've had a hefty exposure to stocks during the last few years, and it's paid off nicely. But that's made my portfolio a bit unbalanced for my retirement-allocation goals, and I need to make some changes. Therefore, I want to move some of my profits into something that will provide a cushion of safety for my portfolio.
I could buy fixed-income assets or just put some of that cash into certificates of deposit. But I'd like to purchase something that has the potential to give me better returns and can still provide stability for my assets, whether in an inflationary environment or not.
When I look ahead, I see inflation, rising interest rates, and geo-political tensions, which may mean I'll be seeing more stock sell-offs like what we've been experiencing so far in 2022. Therefore, I want to set up my portfolio to keep on winning for me. And I'm going to do this by buying gold.
Yes, that brilliant little metal that I wear on my finger, my ears, and around my wrist and neck. Why is gold such a good hedge? The price of goods becomes more expensive as inflation sneaks up on us. And as the dollar rises, so does the price of gold.
However, I can't just go to Tiffany & Co. and buy a giant rectangle of gold bullion. Instead, I'm going to look at gold exchange-traded funds (ETFs), so someone else can do the work for me. It's possible to buy gold mining companies and/or streaming companies, but I'm going to go with the largest physically backed gold ETF, the SPDR Gold Trust. This way, I can participate in the gold market without having to build a vault in which to store my holdings.
While investing in gold isn't going to give me the 11%-plus average annual return of the S&P 500, I can certainly live with the 8.2% annualized return gold has provided since 1971. That ain't too shabby for what people consider a generally safe asset class.
When people are worried, they tend to look for safety
Chuck Saletta (Prudential Financial): One of the best parts about investing in options is the fact that options expire. That forces an options investor to periodically pay attention to his or her holdings and actively make a decision to buy, sell, or hold on to an investment. In my case, when my options position in Prudential Financial neared its January 2022 expiration date, I decided to not just renew the position, but increase it sixfold.
My thought process was a fairly straightforward one, with three key parts. First, inflation was clearly high, which meant that people's insurable interests were likely to increase in value due to that inflation. Insurance companies like Prudential Financial often base at least part of their premium levels on the value of what they're insuring. As a result, inflation could provide a fairly straightforward path for Prudential Financial's revenues to increase.
Second, it wasn't all that hard to predict that the market could be in for rough times in 2022, as it had benefited from a lot of support that couldn't last if there were any hope of fighting that inflation. When the market tanks, many people seek the "safety" of guaranteed investments like annuities, which Prudential Financial happens to sell. As a result, I figured that if the market should happen to fall, that could also bode well for the company's ability to boost revenue through its annuities arm.
Third, Prudential Financial trades on the market for well below its book value and at less than nine times its projected earnings. That gives good reason to believe its shares are available for a reasonable price relative to even a less-than-perfect future.
The combination added up to a company that I was willing to increase my investment in, despite the inflation we're facing and all the baggage it's bringing with it.
We all have to find a way to protect ourselves from inflation's wrath
Whether you pick one or more of these investments, or whether you decide to find your own way forward, it's important to recognize the very real financial pain that high inflation brings with it. Make a plan to help protect yourself from the impact it can have on your financial well-being, and give yourself a fighting chance of making it through intact.
A big problem with inflation is that it won't wait for you to be ready for it before it starts to take away your purchasing power. So get started on your plan now, and get it in place before your cash loses too much more of its value to inflation's wrath.
