How to Build Wealth When Inflation Balloons

Building personal wealth is difficult enough in any economic environment. Trying to beef up your net worth during an inflationary environment where there are invisible forces threatening to erode your portfolio on a daily basis makes things even more challenging. But with the right strategy, you can build wealth when the strength of a dollar loses some of its charm. You just need to know which buttons to push.

Embrace a Diverse Investment Approach

 

Diversification is your best defense in turbulent financial times. Instead of putting all your eggs in one basket, spread your investments across various asset classes. Seems like pretty basic advice, right? Well, it’s amazing how quickly we can lose focus when things go sideways and become too dependent on one class.

 

Take crypto for example. For the past few years, progressive financial advisors have been encouraging people to allocate one to two percent of their portfolios to Bitcoin. That means someone with a $2 million portfolio was being encouraged to have about $20,000 to $40,000 in crypto holdings. But with so much growth in Bitcoin over the past year – it’s up more than 200 percent, depending on when the original investment was made – that $40,000 could be worth as much as $85,000 today. And if other parts of the individual’s portfolio lost value, bringing the portfolio to $1.8 million, that means crypto now accounts for nearly five percent of the total portfolio. Some people would be comfortable with this, while others would want to sell some Bitcoin and rebalance back to a more conservative one to two percent.

 

Go back to the basics and consider rebalancing your portfolio to include stocks, bonds, real estate, commodities, and possibly even some crypto. Each of these assets reacts differently to inflation, and by diversifying, you reduce the risk of significant losses. 

Consider Inflation-Resilient Assets

 

Some investments are known to perform well during inflationary periods. Real assets like real estate and commodities often see their value rise with inflation, making them a good hedge. 

 

Residential rental properties in growing markets are especially strong investments in a market such as this. Just make sure you aren’t adding too much daily responsibility to your to-do list. If you buy a rental in Dallas, for example, make sure you hire a Dallas property management company to oversee it so that you can focus on your larger portfolio.

 

Speaking of resilient assets, investing in sectors like infrastructure and energy can also be wise, as these areas tend to see increased spending during inflationary times. Additionally, look into Treasury Inflation-Protected Securities, which are government bonds designed to rise in value along with inflation.

Stay Flexible with Fixed Income

 

In a rising interest rate environment, traditional long-term bonds might lose value. However, this doesn’t mean you should avoid fixed income altogether. Consider shorter-duration bonds, floating rate notes, and high-yield bonds, which can offer better protection against interest rate hikes. These assets can provide steady income without locking you into low rates for long periods.

Keep an Eye on Growth Opportunities

 

Even during inflationary periods, growth opportunities exist. Companies with strong pricing power, meaning they can raise prices without losing customers, can do well as they pass on higher costs to consumers. Sectors like technology and healthcare might continue to grow due to innovation and demand, regardless of the broader economic climate. By staying attuned to growth opportunities, you can ensure that your portfolio doesn’t just survive inflation but has the potential to grow.

Always Keep Some Cash on Hand

 

Having some liquidity in the form of cash or cash equivalents is crucial. It not only provides a safety net but also gives you the flexibility to take advantage of investment opportunities as they arise. Inflation might reduce the purchasing power of cash over time, but having immediate access to funds can be invaluable in adjusting your investment strategy swiftly when the market changes.

Don’t Do This Alone

 

Navigating an inflationary environment can be complex. Financial advisors and investment managers can offer insights into how different assets might perform and help tailor a strategy that fits your individual risk tolerance and financial goals. They can also keep you informed about the latest market trends and economic forecasts, enabling you to make more informed decisions. 

As you explore ways to diversify your portfolio and make it as inflation-proof as possible, we highly recommend that you at least consult with an advisor to figure out the best way forward.