Here are the five best investments for deflation. A simplistic definition of deflation is that deflation causes the buying power of money to increase. This means that deflation will cause prices to fall. While this seems like a good thing there can be multiple reasons for prices to fall and many are not good. One cause of deflation is when there is a lack of money due to a drastic economic downturn and financial contraction such as during the Great Depression. How to invest in deflationary times?
- Pay off debt during deflation. The best investment for deflation is paying off debt. As the value of money increases so does the cost of debt. Being debt free has a lot of advantages during any phase of an economic cycle but is a major asset during deflationary periods.
- Have cash on hand during deflation. The simplest investment to beat deflation is to hold cash. Cash can be held physically or in demand accounts such as checking, savings, money market, etc. As prices fall your "investment" in cash will generate an increase in buying power.
- Bonds are great investments for deflation. While bonds are an only slightly more exciting investment than holding cash, they will produce some dollar gain while still providing protection against inflation. Treasury Inflation Protected Securities (TIPS) will make one of the best investments for deflation. TIPS will hold value during deflation while also offering protection from inflation when the economic cycle changes.
- Consumer stocks make a good deflation investment. Companies that sell consumer products ranging from toothpaste to toilet paper are generally strong investments for deflation. As the dollar’s buying power increases, consumer product companies can quickly adjust prices to assure profitability for stock holders. Consumer product companies that pay a cash dividend are especially attractive.
- Commodities are a solid investment for deflation. Another safe investment for deflation is commodities and commodity producers. The prices of commodities fluctuate constantly and are not generally harmed by either deflation or inflation. Stick with commodity investments during deflation that are from essential market segments such as food and energy.