Why Suze Orman says you should lean on stocks to beat inflation

#1. Bet on banks

In Orman's blog post, she explains that investors should be prepared for stocks to go through periods where their value dips. She also points out that these are the moments when investors shouldn't panic — or trade based on market fears. Instead, these moments are a chance to snap up more top-shelf stocks at bargain-bin prices.

One sector that consistently offers a rebound on valuation drops is Canada's financial sector. In particular: banks. When the next pullback happens (and it will happen), there’s one place investors might want to look to first, explains Orman, and that's to bank stocks.

Banks tend to fare relatively well even during recessionary periods and during periods of higher costs and higher inflation. Banks also tend to be more stable during Bank of Canada (BoC) monetary policy action — like when rates were raised to fight inflation or, more recently, dropped to incentivize some spending decisions among Canadian consumers and corporations. When interest rates rise, bank assets like bonds and loans, tend to climb higher than its liabilities such as deposits.

Rising rates also mean that banks can earn a wider spread between what they pay out on the interest owed to savers, either on savings accounts or on fixed-income products, such as Guaranteed Investments Certificates (GICs).

Another great thing about buying bank shares is you don't need to overthink it. Investors can either pick two or three of the country’s largest banks, like RBC, TD and BMO, and you should have all the positive exposure to rising interest rates you need. Another option is to purchase shares for each of the Big 6 Banks in Canada. Finally, an investor can simplify this process and purchase an exchange-traded fund (ETF) that focuses on financial sector holdings. Good options include:

• Horizons Equal Weight Canada Banks Index ETF (TSX:HEWB)
• BMO Equal Weight Banks Index ETF (TSX:ZEB)
• RBC Canadian Bank Yield Index ETF (TSX:RBNK)
• Hamilton Canadian Bank Mean Reversion Index ETF (TSX:HCA)
• CI First Asset CanBanc Income Class ETF (TSX:CIC)
• iShares Equal Weight Banc & Lifeco ETF (TSX:CEW)
• BMO Covered Call Canadian Banks ETF (TSX:ZWB)

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#2. Include insurance

Even when people slash their budgets to help offset rising prices, we know that car, house and life insurance premiums will keep being paid. What this means is that insurance providers offer an excellent option when it comes to investing in a defensive business — a business that does well, even when the rest of the economy isn't doing that great.

Stock in an insurance provider can offer plenty of upside in an investment portfolio, especially since insurers typically earn better returns on their “float” when rates rise.

And on top of that, insurers often pay their shareholders dividends, which means you can count on a little extra cash a few times a year.

For those interested in investing in insurance, Manulife (TSX:MFC), Sun Life Financial (TSX:SLF) and Great-West Lifeco (TSX:GWO) are some of the big names in this sector. All can be bought through an online trading account.

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#3. Polish those precious metal stocks

When it comes to investing in precious metals, these stock picks can be worth their weight in gold.

Gold and silver have long been considered safe haven assets, meaning when all else fails, their value doesn’t really tarnish.

You can always buy precious metal bullion or coins, but mining stocks and ETFs allow you to invest in the space at a low cost and without needing to find storage.

Moreover, large diversified mining companies like Rio Tinto (TSX:RIO) and Freeport-McMoRan (TSX:FCX) also dig up metals like copper, which is currently experiencing booming demand due to its role in electric vehicle production.

Historically, the best time to make money from metals is when inflation is poised to keep increasing or remain sticky — like right now.

Sources

1 Suze Orman blog post (July 2021)

— with files from Romana King