Best Investments for Stagflation (How to Beat Stagflation in 2023)

How To Beat Stagflation in 2023 (photo credit: PR)
How To Beat Stagflation in 2023
(photo credit: PR)

With so much uncertainty in the world today, it is natural to wonder how you and your family will weather the near future.  The area that causes the most amount of stress for people in this regard is finances.

There has been much discussion in the news about the performance of the economy, especially in the light of the recent bearish market.  Some analysts have even used the word ‘stagflation,’ a condition that has not been seen since the oil crisis of the 1970s. 

In the face of this uncertainty, many average Americans are looking to protect their financial wellbeing.  Key to this is understanding why analysts are discussing the possibility of stagflation, and how to manage your finances so that you and your family are protected from downturns in the economy.   This article will go over these questions, as well as how to protect your retirement accounts from devaluating during stagflation, and provide you tools to help you navigate changes in the economy.

What Is Stagflation?

Stagflation is so called for when the conditions that it describes exist in combination: the stagnation of the economy combined with high inflation.  This stagnation is usually in the form of a recession, especially when there is high unemployment, low consumer demand, or a decline in average income levels relative to the cost of goods.

A discussion of stagflation is incomplete without mentioning the ‘poster child’ for this condition: the 1970s.  During this time, unemployment reached 9% while inflation rose into double digits, and the prices of energy skyrocketed.  Economic growth was also uneven, with many Americans soured on the economy in general.  This condition lingered into the 1980s before the economy began to recover.

How Does Stagflation Affect the Economy?

Since stagflation decreases overall participation in the market, stocks in most companies begin to decline as the costs of business increases and sales decreases.  According to Goldman Sachs, during stagflation, the market returns dip to -2.1% per quarter.  Earnings per share also take a hit, and dividends and reduced or suspended as businesses chose to hold on to their assets in order to navigate the downturn in business.

Of course, if the business cannot make it, it will go bankrupt.  Small businesses may fold quickly under pressure, but larger publicly traded companies are also at risk, and spread out the effect even further.  Not only does a bankruptcy of a publicly traded company affect shareholders, but also bond holders as well, since companies will be unable to pay off their debts. 

How Can Stagflation Affect Me?

Since a high inflation means a higher price of goods, more people struggle to meet basic needs even while the potential for unemployment increases.  And those who remain employed face lower wages, leading to a decreased purchasing power and a subsequent dip in consumer confidence.

While it may seem that one must only weather the storm, stagflation can have lingering effects on your long-term finances long after stagflation has dissipated.  Most financial investment strategies have a well-rounded mix of cash, bonds, and stocks to spread their risk – all which perform poorly during stagflation.  For most retirement savers, their future incomes are tied up in 401(k)s or Individual Retirement Accounts (IRAs), which also rely on similar financial instruments.

Are We Headed Towards Stagflation?

It is impossible to state with any amount of certainty where the economy is headed.  Prior to the 1970s, most financial experts did not even believe stagflation to be possible, and it is still not well understood today.

There are reasons for optimism.  While inflation was higher earlier this year, Federal Reserve Chair Jerome Powell recently observed that inflation seemed to abate during October and November, though he followed this with a warning – “…it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”  At the moment, unemployment is low, and the availability of jobs is high.

But while this appears to be a moment of economic calm, many do not necessarily take the news as a sign of recovery.  Earlier this year, Forbes Magazine noted, “As of June 2022, the United States is not in stagflation, nor is most of the world, but it’s likely coming… stagflation will show early signs late in 2022 and get roaring in 2023.”  The World Bank highlights the conditions that keep the economy in an uncertain state. “Compounding the damage from the COVID-19 pandemic, the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation.”  And Bank of America has reported that over 92% of hedge fund managers expect 2023 to see a downturn in economic conditions.

In summary, there is no certainty that 2023 will see stagflation.  However, many financial experts believe that it is coming, and are gearing themselves to hedge against it.

What Can I do To Protect Myself During Stagflation?

The best way to protect yourself is to speak to a financial consultant and take actions to redistribute your financial portfolio ahead of economic downturns.  There are a number of strategies that one can use to hedge against stagflation, but financial experts will usually recommend some kind of diversification of value stocks, cryptocurrency, real estate, and precious metals.  The rest of this article will discuss each of these in turn.

#4 - Value stocks

Stagflation and economic stagflation will not last forever.  The strategy of investing in value stocks during economic downturns is predicated on the theory that when the market rebounds, the investments will pay off in a much bigger way.  These stocks are inexpensive, meaning that you can spread your risk around into a number of business sectors.

This is a very speculative approach to hedging against stagflation, however.  It is difficult to know which companies are bargains and which will go bust.  Spreading out your investments hedges against losing all your assets, but there are no guarantees that your gambles will pay off.

#3 - Crypto Currency

A non-conventional option for hedging against inflation is crypto currency.  Crypto currency typically follows traditional markets in terms of value, so it is generally viewed as no better than the rest of the market. 

That said, cryptocurrencies are not pegged to the monetary policies of any individual country, which means that in the face of hyperinflation, cryptocurrencies may be more stable as a cash equivalent.  They are also a reasonably liquid asset, which means that it may hold

That said, given the recent scandal involving the cryptocurrency FTX and the general mistrust of cryptocurrencies, this is a risky place to put your money, and you should be cautious about placing too much of your assets in this area.

#2 - Real Estate

One of the better investments for those who can afford it is real estate.  During stagflation conditions, property prices and rent are on the rise while the higher cost of construction decreases the amount of new properties on the market. There is also less competition from homebuyers since general purchase power has decreased.

Real estate also has the advantage of staying stable over time, since the requirement for housing does not change.  That said, it is a time intensive investment that requires attention and upkeep.  There are also feeds and taxes to consider, and income may be subject to rent control laws.

#1 - Precious Metals

In addition to real estate, investment into precious metals is frequently recommended by many financial experts as an important part of stagflation investing strategy, especially gold.  The value of gold is sometimes overstated, but it is still an important investment option. 

Gold and other precious metals are usually stable under normal market conditions.  Financial experts usually advise between 5% to 10% of your investment portfolio focus on precious metals for this reason – it is a conservative investment that increases in value enough to keep up with inflation.

However, in the face of economic uncertainty, precious metals do particularly well – there is actually an inverse correlation between the value of the dollar and the price of gold.  During the stagflation period of the 70s, gold trebled in value, and kept a high value (albeit at a slightly reduced rate) when the economic crisis had abated.  That said, gold and other precious metals do tend to appreciate slowly under normal conditions, but this may not be a significant concern if you are planning to leave that gold over the long term.

Click here to get a free gold investment guide & learn how to protect your IRA/401(k)

Join a Free Gold & Silver Web Conference hosted by Augusta Precious Metals (Industry "Best Overall Gold IRA Company in 2022" by Money Magazine). Attended by 1000s of Americans, this web conference will teach you how to diversify your savings to hedge against stagflation in today's volatile economy. 

Click here to reserve your spot in best stagflation investments web conference

How Should I Invest for Retirement During Stagflation?

Given the choices of investment strategies mentioned above, one of the easiest ways to stagflation-proof your account is to rollover your IRA / 401(k) into a Gold IRA.  Precious metals are not liquid which makes them ideal assets for retirement accounts.

What is a Gold IRA?

Gold IRAs are similar to traditional IRAs; it offers you tax advantages for income that is invested into the fund, allowing the value of the account to appreciate for its eventual withdrawal in the future.  However, A Gold IRA is self-directed, meaning that you will have more direct control over the management of your assets, and it invests solely in precious metals.

As suggested by the name, Gold IRAs focus investments in physically owning gold, but can also include other precious metals such as silver, platinum, and palladium.  These metals are usually in bullion, but many brokers also deal in coins. 

See Also: Best Gold IRA Companies

Buyer Beware - Most common Gold IRA dealer lies

How Do I Open a Gold IRA?

Gold IRAs must be set up through investment firms that deal specifically with precious metals.  Due to the requirements for storage and other legalities that come with trading precious metals, traditional institutions are not usually equipped to handle these types of transactions. 

It is surprisingly easy to convert your existing accounts over to Gold IRAs.  Most reputable Gold IRA investment companies will offer you direct funding from your traditional IRAs or 401(k)s in order to fund the new account.  Since the funds are moving from one retirement account into another, it will not be taxed or fined for early withdrawal. 

What Else Do I Need to Know about Opening a Gold IRA?

Investing into a Gold IRA may require a sizable amount up front to open your account.  $50,000 is typical of most reputable firms.  Some firms offer lower opening amounts, but these should be considered carefully alongside fees that you may incur.

Because of legal requirements involved with Gold IRAs, there may be annual maintenance fees, storage fees, and fees associated with opening the account.  Some companies may waive some or all of these fees at higher levels of investment, however, which is something to consider when selecting which companies to do business with.

Click here to get a free gold investment guide & learn how to protect your IRA/401(k)

Join a Free Gold & Silver Web Conference hosted by Augusta Precious Metals (Industry "Best Overall Gold IRA Company in 2022" by Money Magazine). Attended by 1000s of Americans, this web conference will teach you how to diversify your savings to hedge against stagflation in today's volatile economy. 

Click here to reserve your spot in best stagflation investments web conference

Final Thoughts When Planning for Stagflation

At the beginning of this article, we mentioned briefly the causes for optimism in the market today.  There are positive indicators out there, and no economic crisis lasts forever – one must make investments accordingly. 

However, market uncertainty is driven by uncertainty in the wider world.  While the crisis caused by the COVID pandemic seems to have largely passed us by, its effects are still with us, especially in the workplace as the power shifts between business owners’ requirements and worker demands. The war in Ukraine has contributed to high energy prices – while they have stabilized for the moment, there is no telling how long this calm will last. 

In order to come out ahead of stagflation, retirement savers need to reconsider their financial portfolios now.  Consult with financial experts and plan your future accordingly.  No one can say for certain whether the market will recover or worsen, so taking charge of your finances now and hedging against disaster in the future is imperative.

Frequently Asked Questions

Is stagflation worse than recession?

Yes.  Stagflation includes recession as a necessary condition and adds high inflation to the mix.

What happens during a stagflation?

To put it simply, the average income level is lower, average prices of consumer goods are higher, and the value of currency is lower.  This results in less consumer confidence, which slows economic growth and increases the risk of unemployment rising; these conditions feed on one another, making recovery from stagflation difficult.

Is America in stagflation?

The general consensus is that the United States is not currently experiencing stagflation.  However, many experts believe that there is a high risk of stagflation beginning in 2023.  There are also concerns about global stagflation, which will affect the economy of the United States as well.

Who will suffer most from stagflation?

Families with low or fixed incomes and retirement savers are at highest risk from suffering during stagflation.  This is due to decreased purchasing powers and higher consumer good prices, forcing families to focus more on the essentials.  This effects the economy as a whole and will cause markets to perform poorly, decreasing the value of retirement accounts.

Is it Better to Invest Directly in Gold or to Open a Gold IRA?

We talked in this article about gold as an IRA investment, but many people may also consider buying gold directly.   Both methods can have a place in your financial portfolio, but you must consider each considering their advantages and disadvantages.

Direct purchase of gold and other precious metals gives you direct control over your assets and more options on how you buy and sell and will give you the immediate financial benefits when sold. However, a Gold IRA protects you from taxes while the value of your assets grow and working through a Gold IRA company guarantees that you will find buyer for those metals.

What Industries Do Well in Stagflation?

Metals and energy generally do better than most other sectors.  If you are looking for stocks, agriculture stocks tend to well since food prices are on the rise and is a market whose demand will generally not change.

How Else Can I Financially Prepare for Stagflation?

Aside from managing your investment portfolio, there are a few other considerations to help you prepare for stagflation.  This includes cleaning up your credit and reducing your debt, since uncertainty in future income may affect your ability to do so during stagflation.  It is also important to act quickly – trying to time the market can result in devaluation of your financial assets.


Disclaimer: The information provided on this page is for educational purposes only and is not intended as investment advice. Refer to a professional for investment advice.