Quora Answer: What is the Best Investment Strategy for an Economy with Increasing Inflation?

The following is my answer to a Quora question: “What is the best investment strategy for an economy with increasing inflation?” 

Inflation is the rate of decline of your purchasing power due to the falling value of the currency you own, relative to the general increase in the prices of goods and services.  That means funds in the money market, and debt instruments such as bonds will decline in value.  Correspondingly, the value of real assets such as stocks, real estate, and commodities such as gold will increase in value. 

Gold has been the traditional hedge against rising inflation.  However, this is a short term measure because once there is a market correction, the value of gold will drop.  Over an extended investment horizon, while there will be an increase in value, unless you happen to live in some sort of banana republic, the rate of increase in value of your holdings will not keep pace with the general increase in value of other forms of investments. 

Real estate is also a good hedge against rising inflation, but there are caveats here.  Real estate prices depend on demographic pressure and other economic factors beyond inflation.  If you are in a growth region, price pressure will trend upwards.  There is also the consideration for types of property, or REITs.  Real estate is prone to bubbles, and investment in real estate involves a lot of leveraging, which is an inherent risk.  Finally, real estate, except for REITs, is not liquid. 

For the risk averse, average investor engaged in long-term financial planning, the best investment is index funds, or blue chip stocks.  Individual stock picks is a lottery unless you have access to the sort of market analysis that investment houses and banks do.  However, the market has always trended upwards.  Investing in an index of the market spreads the risk across multiple regions and economic sectors.  It is relatively affordable.  And most importantly, your holdings are liquid, which means you can pivot towards bonds when the market dampens.