You Can’t Control Inflation, But You Can Control What You Do About It

Inflation might seem scary, but you can easily overcome it with good investing behaviours and the right assets.

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Ever experienced that sudden jolt of surprise at the checkout counter? Maybe it was during a grocery run, grabbing dinner at your favourite restaurant, or filling up your car’s tank. If you found yourself muttering, “Wasn’t this cheaper the last time?”, then, my friend, you’ve had your first dance with inflation.

Inflation, in its simplest form, is the rate at which the general level of prices for goods and services rises, causing the purchasing power of money to decrease. Think of it as the invisible hand that makes your dollar today perhaps not stretch as far as it did a year ago.

This rate is meticulously tracked and often represented through the Consumer Price Index (CPI), which is essentially a barometer for the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Recent times have seen a noticeable uptick in inflation, and it has been headlining financial news quite a bit. Understandably, this might have sent ripples of concern through your investment plans. After all, no one likes the idea of their hard-earned savings losing value.

But fret not, because while inflation might be out of our individual control, how we respond to it isn’t. Stick around, because I’m about to share two actionable strategies to ensure your finances not only withstand inflation’s tide but might even thrive amidst it.

worry concern

Image source: Getty Images

Option #1: Do nothing

That’s right – sometimes the best action is inaction. “Do nothing and stay the course” might sound counterintuitive, especially when the financial landscape seems to be shifting.

But there’s wisdom in this simplicity. Investing in a diversified portfolio of stocks over the long haul has consistently emerged as one of the time-tested strategies to outpace inflation.

Historically, equities have demonstrated the ability to generate returns that not only match but exceed inflation rates. The reasoning is quite straightforward: as prices increase (thanks to inflation), so do the revenues and, often, profits of companies. As these companies grow and become more profitable, their stock prices tend to rise, offering investors a piece of this growth.

But, and this is crucial, this approach comes with its own set of caveats. First and foremost, you’ll need patience. A diversified portfolio’s ability to beat inflation is most evident over extended periods. Short-term market fluctuations are a given, and if you’re looking for a quick turnaround, this might not be the strategy for you.

Additionally, it’s vital to have the fortitude to withstand the inherent volatility that comes with stock market investments. There will be peaks and valleys, but the long-term trajectory, historically speaking, has been upward – as long as you stay diversified.

For those considering this approach, BMO S&P 500 Index ETF (TSX: ZSP) stands out as a compelling option. This ETF offers exposure to a broad array of U.S. equities, mirroring the performance of the S&P 500. And with an expense ratio of just 0.09%, it is very cost-effective.

Option 2: Invest in energy stocks

Dipping your toes into the energy sector, especially oil and gas exploration and production companies, might just be another avenue to consider when warding off inflation’s bite. Historically, these energy stocks have shown potential as inflation hedges. The reason?

Well, they’re grounded in tangible assets like oil reserves and gas fields, which often see their value rise alongside inflation. Additionally, as inflation affects the broader economy, energy prices often climb, too, potentially increasing revenues for energy producers.

However, the sector isn’t without its challenges. It’s known for volatility, with prices influenced by factors ranging from geopolitical events to decisions by entities like OPEC. Additionally, sudden shifts in supply and demand can dramatically sway the profitability of these companies.

For those intrigued by the energy sector but hesitant about navigating its intricacies, BMO Equal Weight Oil & Gas Index ETF (TSX: ZEO) could be the answer. It offers a piece of 10 equally weighted Canadian energy stars, serving as a balanced gateway to Canada’s vibrant energy scene. Currently, it’s also paying a sweet annualized distribution yield of 4.85%.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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