Written by Steven Porrello at The Motley Fool Canada
Nowadays, everywhere you turn, you see the effects of rising inflation. Food prices at the grocer? Upper. Gasoline prices at the pump? Upper. Housing costs? You guessed it. Astronomically upper.
While the Bank of Canada is confident that inflation rates will stabilize by the middle of next year, savvy Canadians might ask: is there a way to profit from inflation?
Yes, in fact, there are many ways to profit from rising inflation rates. Inflation can be a major disappointment for most people, but if you capitalize on these opportunities, you could turn inflation into a side business.
1. Real estate
Historically, homes have been one of the best ways to profit from inflation. On the one hand, inflation directly feeds the equity in your home. As manufacturing prices rise with inflation – wood, drywall, cabinets, appliances – the cost of homes will naturally increase as well. And as the cost of homes continues to rise, well, you guessed it, yours will likely become more valuable too.
Better yet, own a rental property and rent apartments to tenants. Like houses, apartment complexes and properties tend to increase in times of inflation. As the value of the property increases, so does the rent, which could mean more profit for you.
If you’d rather not deal with cantankerous tenants (come on, it’s not always flowers and roses), you can still profit from real estate by investing in a real estate investment trust (REIT). A REIT is simply a real estate company that uses investors’ money to finance their real estate projects. As an owner of REIT shares, you can make impressive gains when a real estate company is doing well. And if it does well during times of inflation, which it does historically, you could very well benefit from rising real estate costs.
Other forms of real estate investing that could help you take advantage of inflation include vacation rentals, commercial property rentals, and even house rollovers.
2. Buy collectibles
Alright, alright, I need to clarify here. By collectibles, I’m not suggesting you buy Pokemon or Pop cards! The figures. Instead, I suggest you consider a category of securities that are often overlooked: alternative investments.
An alternative investment is pretty much anything that isn’t stocks, bonds, or cash. These can be tangible assets, such as paintings, rare coins, stamps, or bottles of wine. Or it could include assets that are not tangible, such as hedge funds or certain commodities like gold and steel.
Like real estate, the value of alternative investments tends to increase with inflation. All you have to do is look at how many raw materials have climbed over the years (by some estimates a bottle of wine in 2021 is 316% more expensive than the same bottle sold in 1963) to understand how the objects of collection can help you profit from the rise. rates.
Of course, collectibles come with their own set of problems. First, to realize the gain on inflation, you actually need to to sell your collectibles. For some alternatives, like a Flowing Hair Silver Dollar or a Picasso, this won’t be a problem, while others may require more work.
3. Invest in cryptocurrency
Finally, another potential hedge against inflation is cryptocurrency. Like gold and other commodities, cryptocurrency is over. If inflation continues to rise, the government may choose to print more Canadian dollars, which will ultimately decrease their value. But with crypto, the government can’t just make more coins. Crypto has a limited supply, which protects its value from rising prices.
Now, of course, there has been a lot of controversy over crypto’s alleged inflation hedge. Many people have rightly pointed out that crypto is far too volatile right now to be considered a good hedge. In the long run, however, the crypto could reach a point where, like gold, its value could help investors in times of particularly high inflation.
Should we be worried about inflation?
In general, yes, you should definitely create a strategy that will help your investments, whether in stocks or alternatives, to exceed the rate of inflation. But if you’re worried about “rampant” or “high” inflation based on what we saw in 2021, here’s my take: don’t hit the panic button just yet.
Although inflation has been particularly high this year, this can be attributed in large part to supply shortages induced by the pandemic. When the world shut down last year, it disrupted our supply chains. According to the laws of supply and demand, when supply goes down, prices go up.
It’s not a bad idea to start adding “inflation-proof” investments to your portfolio, like the three I’ve touched on here. But I would wait another year before I panic about hyperinflation.
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The publication Rising Inflation: 3 Ways to Profit first appeared on The Motley Fool Canada.
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