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This Asset Class Has the Best Performance Record During High Inflation


Unless you’ve been living under a rock, you know that the U.S. is currently in a period of fairly high inflation — the inflation rate was 7.0% in December of 2021. While much of the analysis has been on the political implications of high inflation — and how it impacts Americans ability to afford basic goods like groceries — there is also the matter of how inflation impacts investments. And while inflation can cause trouble for investors, there are investments that perform well in periods of high inflation. According to a recent paper from wealth management services company Northern Trust, the asset class best positioned to protect your portfolio during a high-inflation period like right now is equity-based real assets.

For help investing in these assets or with any other financial planning concerns, consider finding a financial advisor using SmartAsset’s free financial advisor matching service.

Inflation Defined

inflation beating assetTo understand how to counteract inflation, it helps to first understand exactly what inflation is and how it works. In short, inflation is when the costs of goods and services rise, giving money less purchasing power. If you earn $50,000 a year but the average cost of living goes up 7%, you’ve in effect gotten a 7% reduction in pay.

Inflation can be caused by myriad economic factors. Economists from different schools have argued for centuries about what causes inflation, but it comes down to that money simply doesn’t have the purchasing power it used to.

Northern Trust notes that even a 1% jump in inflation rate can have a big impact on retirement savers. A person saving from age 25 to 67 would see a reduction of retirement income of 36% in real terms if the inflation rate was consistently 3% rather than 2%.

Equity-Based Real Assets Defined

Now that we’ve gotten a very basic understanding of what inflation is, we should take a closer look at the asset class Northern Trust believes is a good investment during periods of high inflation.

Equity-based real assets include natural resources, global listed infrastructure and global real estate. A real asset is an investment where the value comes from the intrinsic value of the asset rather than an invented value. Stock in a company, for instance, has no real value — at the end of the day, it’s just a piece of paper. The value comes from the value of the company as determined by the market. Land and oil, meanwhile, have intrinsic value as usable resource.

Equity-based real assets, though, have some market mechanism. For instance, investing in a Real Estate Investment Trust, or REIT. A REIT is a type of company that owns and operates real estate assets that produce income. You are investing in the land through the REIT, which is both easier and mitigates some risk.

Equity-Based Real Assets and High Inflation

inflation beating asset

One common investment to offset inflation are treasury inflation-protected securities (TIPS). Northern Trust, though, found that the relatively lower return from these investments may actually not cover the loss caused by high inflation. Many types of equity-based real assets, though, perform well during high inflation. Natural resources, for instance, see a 20.9% return during high inflation, while global listed infrastructure sees 14.5% returns.

It’s important to note these classes may not see as good of returns during normal inflation. Natural resources only see a return of 2.4% during normal inflation. For this reason, it’s important to monitor inflation if you plan on using these assets as part of your inflation strategy.

The Bottom Line

Inflation is something all investors are dealing with right now. While there are many strategies to deal with inflation, one recommended by wealth management firm Northern Trust is to invest in equity-based real assets including real estate and natural resources.

Tips for Dealing with Inflation

  • A professional can help you deal with inflation or any other problem the economy throws at you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Use SmartAsset’s inflation calculator to see how inflation could impact you.