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About Deflation Investing: Which is Best?

written by: Bruce Tintelnot•edited by: Jason C. Chavis•updated: 9/30/2010

There are numerous investment possibilities during deflationary periods. Some options include fixed-income securities, stocks, and gold. To find the best investment for deflation, it's important to remember to seek out the necessary knowledge that will help your portfolio.

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    About Deflation Investing: Which Is Best?

    When deflation sends the economy into a downward spiral many investors ask, "What's the best investment for deflation?"

    The usual common wisdom that you hear is that the number of opportunities has also declined with the markets, so the only thing that an investor can do is "batten down the hatches, and ride out the storm," which usually means to look for the most conservative income investments to be found.

    During periods of deflation, prices for goods go down as the demand for money increases. This usually means smaller profits in the business sectors causing a decline in retained earnings that also affect stock prices.

    There are ways to perform damage control on your portfolio, and possibly even take some gains. A good thing to keep in mind while searching for these is that higher returns are usually accompanied by a higher degree of risk. This holds true under any economic condition and utilizing the services of a brokerage firm or an investment counsleor can be helpful.

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    US Treasury Bonds - These are considered the top-of-the-line bond investments. They are the lowest risk bonds, which means that the coupon rates are also going to be low; and if demand for them is high they might be overpriced.

    High Quality Corporate Bonds - These have higher coupon rates than US Treasuries. There is more risk to them because a company can go into bankruptcy, though this is considered less likely with the highest rated ones.

    Dividend Stocks - Again, quality is the watchword. Companies with a history of strong earnings, and regular dividend distributions are something to be sought out.

    Tax-Exempt Bonds - These are issued by states, counties, and municipalities. The tax-exempt feature has always made these attractive investments to investors because the after-tax return adjusted for the investor's tax rate is actually higher than the coupon rate on the face of the bond. Any tax-exempts, including municipal bond funds, are considered a low risk investment, and the low coupon rates for the bonds reflect that. During deflationary periods they would still look good to many investors.

    Bank Certificates Of Deposit (CD) - A CD offers a good short-term alternative for deflationary investing when interest rates are low. They can be considered risk-free because they are insured by the Federal Deposit Insurance Corporation (FDIC) up to whatever the limit happens to be.

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    Stocks In Big International Companies - These companies don't sell their products in just one economy to increase their retained earnings, a similar idea to diversifying a stock investor's portfolio. When one economy is experiencing economic problems, other stronger economies can help bolster the earnings. An adverse global situation that affects all economies would probably be a problem.

    Stocks Of Companies That Sell Cheap Goods - During times of deflation when money is in increasing demand, or the supply is decreasing, companies that sell cheap consumer products seem to do well. (Companies like Wal-mart, Sears, McDonald's, Family Dollar Store...etc.)

    Gold Stocks - During periods of deflation stocks of gold producers tend to perform well due to the fact that their costs are decreasing in relation to what they sell. The reverse holds true once inflation solidly sets in.

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    Gold Bar 

    Gold - Gold has always historically been on everyone's "safe haven" list during unsure economic times because of the fact that it retains value. Its price can be driven sharply upward by panic buying and hoarding, which may not actually happen quickly. The price in relation to the supply can become artificially high because of this fact. This sets the stage for falling prices.

    Deflation is one of the vagaries that are experienced in today’s market driven economies. It can be depressing to watch one’s investment portfolio take such a dramatic dive, but some strategic planning beforehand can lessen the effect. There are also some investments that can help achieve this during such a period. Doing homework or finding someone knowledgeable definitely helps.

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    Image Source

    Gold Bar. (Supplied by Swiss Banker at Wikimedia Commons; Public Domain;