The risks and rewards of any investment depend on the nature of that investment. Each type of investment vehicle has different properties that lead to various risks—and rewards. Today, we’re going to look at the impact inflation has on bonds versus real estate: which investment benefits from the change in the value of a dollar, and which investment flops under this economic pressure?
Bonds
Bonds are a type of investment that involve the investor giving a loan to a borrower (usually a government or corporation). The investor then makes money off the bond through interest payments made on the loan’s principal, in addition to the payments received as the principal itself is paid off.
Bonds are typically considered a “low-risk” investment, but that does not mean that they are without risk. Why? Inflation. Even as the value of a currency decreases, the dollar amount that the bond is said to be worth remains the same.
So, what does that mean? Basically, as inflation increases, the value of the bond decreases. If you put in a thousand dollars, you’ll be receiving that same thousand dollars back as the bond is paid off by the recipient, even though, as time goes on, the buying power of a thousand dollars decreases.
The longer the term of the bond, the greater the negative impact inflation is likely to have on its value. Remember, inflation is, most of the time, increasing. You can’t count on a long-term bond to have your back.
Real Estate
Real estate investors, on the other hand, can find a lot of value in inflation. If a real estate investor plays their cards right, the property of inflation can inflate the value of your property.
Think of it this way. When inflation rates are high, it becomes more difficult for the average Joe to get a mortgage. That means he’s not buying a house, but he still needs a roof over his head. What does he do? He rents!
This increase in the demand for rental properties means that real estate investors can actually have a really good time during periods of high inflation, even when that same inflation is putting a strain on other types of investments, like bonds.
When you set out to invest, you have to consider the risks along with the rewards. Ballooning inflation can pop even a “low-risk” investment like a bond, but real estate can still remain afloat even in the most inflationary times. For this reason, and many others, real estate might be your best investment
option yet.
