As the United States (and much of the world) contends with decades-high inflation, investors may find themselves concerned about their portfolios. After all, major economic changes have a profound impact on not just our investments, but on life itself.
Here’s the good news: if you’re employing the right strategies, you do more than just survive. You can thrive through inflationary periods.
Here’s what you should know:
5 Factors That Make Your Portfolio Great Despite Inflation
#1 – Including Residential Real Estate
As noted by The Motley Fool, real estate is one of your best investment choices during periods of inflation – even in the extremes we’ve seen in recent times. Real estate is lauded for being a hedge against inflation. Not only does its value increase alongside inflation, but so does cash flow. Residential real estate is essential, and as such, rent rates grow with both demand and inflation.
REITs out-perform when inflation rises above 7%. When you own investment properties yourself, this is only truer! You benefit not from others who are in the real estate game, but you directly benefit from accelerating equity and cash flow.
Residential real estate investments not only do well in inflationary periods, but they also work well in recessionary periods because demand remains. You’ll find that, overall, properties retain their increased value even when inflation winds back down and the economy shifts into other stages of the cycle.
#2 – Cheapening Your Debts
One of the big benefits of investing in real estate is your ability to leverage. This means you use only a portion of your own money to acquire an investment while leveraging the rest from financial institutions or a private source. Naturally, an investor who owns many properties may have some significant mortgage debts to pay off!
One of the worst things about inflation becomes your advantage. The cheapening of the U.S. dollar means that effectively, your debt balances (which do not change) are worth less than when you started, relative to the value of the dollar. Because, unlike your property’s equity, your debts don’t grow with inflation.
#3 – Focusing on Cash Flow
Cash flow is far from the only benefit of investing in real estate. Combined with equity, leverage, and tax benefits, you’re looking at a stellar combination! But during inflationary periods, your streams of cash flow can increase significantly. You can (and should) adjust rent prices to keep pace with inflation and the growing costs of management and maintenance. But it’s also a good time to invest in your properties – making them as desirable as possible for residents. Amenities, great management, and well-designed properties mean that charging a premium isn’t just about inflation. It’s about providing premier properties and a great experience.
This boosts resident retention even as prices rise. Focusing on cash flow doesn’t mean squeezing blood from a stone: it means making your properties worthwhile so that you can minimize vacancies despite rising prices.
#4 – Strong Diversification
Portfolio diversification is at the heart of true investment success. It’s recommended, for example, that every investor have a portfolio made up of at least a 20% share of real estate. Varying the types of investments in your portfolio creates balance and stability during changing economic conditions. For example, your S&P 500 stock isn’t going to fare all that well in an inflationary period.
Investing in real estate, though, which typically out-performs during inflation, means that your portfolio remains strong and stable even if one portion of your portfolio suffers.
Diversification isn’t limited to types of investments, either. Within real estate investment, you diversify by acquiring multiple investment properties over a variety of investment markets. This maintains portfolio strength if you encounter vacancies, natural disasters, or a local economic crisis.
#5 – Being Picky
Building a thriving portfolio during inflation isn’t easy. After all, acquiring properties will cost more. You got to be surer about your choices than ever. There’s a balance to strike between seizing opportunities and waiting for the right investments to come along.
You should always be actively seeking out new acquisitions to diversify your portfolio and increase your streams of income. But that doesn’t mean every opportunity is worth taking – particularly in this economy!
If you know exactly what you’re looking for, you can make better, highly targeted investment decisions. Be picky. Ask questions. Do your due diligence. This empowers you to build a portfolio you’ll never regret!
Join thousands of REI Nation investors in building wealth in today’s tough economic climate!
