‘It’s not taxed at all’: Warren Buffett shares the 'best investment' you can make when battling inflation — and it doesn't have to cost you a dime

Skills are inflation-proof

Buffett firmly believes that anyone can mitigate the impacts of inflation by focusing on continuous self-improvement.

By staying on top of your game in your chosen field, you can expect to be paid at the top of your pay grade. Better still, knowledge and skills can’t be taken away from you.

“Whatever abilities you have can't be taken away from you,” explained Buffett in a shareholder letter. “[These skills] can't be inflated away from you.” He continued by stating that “the best investment by far is anything that develops yourself — and it's not taxed at all.”

How to maximize the tax-free benefits of knowledge and skills

For some Canadians, this could mean learning a trade or getting a college or university degree. For others, it may mean working with a mentor or completing training courses related to your profession.

But, to be clear, the investing guru doesn’t believe that gaining knowledge or skills needs to be an expensive endeavour. Instead, he suggests we aim to do everyday things “exceptionally well.” For instance, he suggests developing your communication skills — both written and oral — as this is key to almost all work place environments.

“One easy way to become worth at least 50% more than you are now … is to hone your communications skills,” he previously said in a video posted on LinkedIn.

“If you can't communicate, it's like winking at a girl in the dark — nothing happens. You can have all the brainpower in the world, but you have to be able to transmit it, and the transmission is communication.”

A better online investing experience

Easy to use and powerful, Qtrade's online trading platform puts you in full control with tools and resources that help you make well-informed decisions.

Invest Now

Other ways to hedge against inflation

Updating skills is one way to hedge against inflation. Other tactics include developing basic (but integral) money management skills, using tax-advantaged accounts and focusing on the diversification of investments.

Why diversification is critical (and costs you nothing extra)

Diversifying your investments with assets not correlated with equities is important because it helps manage risk, stabilize your portfolio, and improve long-term returns. Here’s why:

1. Reduces portfolio risk

Equity markets can experience significant volatility due to economic downturns, geopolitical events, or other factors. By holding assets that are not correlated (e.g., bonds, real estate, commodities, or alternative investments), you reduce the impact of stock market fluctuations on your overall portfolio.

2. Improves risk-adjusted returns

Diversification across non-correlated assets lowers your investment portfolio’s overall volatility without sacrificing returns.

Plus, an over-reliance on equities exposes you to concentrated risks that could significantly erode wealth in the event of a prolonged market correction. Diversifying with non-correlated assets helps mitigate this risk, safeguarding your financial future.

3. Hedges against different economic scenarios

Different assets respond uniquely to economic conditions. For example:

• Stocks may excel during periods of economic growth.
• Bonds may thrive during recessions or deflation.
• Commodities and real assets may perform well during inflationary periods.

As a result, a diversified portfolio is better positioned to weather various economic cycles.

4. Leverages the power of asset allocation

Modern portfolio theory emphasizes the importance of asset allocation in driving returns. By diversifying with assets that have low or negative correlation to equities, you maximize the benefits of diversification and potentially enhance your overall return.

5. Provides stability during market downturns

Non-correlated assets often perform differently or even inversely to equities during downturns.

For instance, bonds tend to perform well during economic slowdowns when equities are under pressure, while gold is seen as a "safe haven" during times of market uncertainty. For investors looking for steady income, real estate can provide inflation-adjusted, ongoing returns and property typically holds its value when stock markets are volatile.

These alternative assets can act as a cushion against losses, preserving portfolio value.

Empower your investments with Qtrade

Discover Qtrade's award-winning platform and take control of your financial future. With user-friendly tools, expert insights, and low fees, investing has never been easier.

Start Trading Today

What Buffett says about alternative investments

Real estate

According to Buffett, real estate is generally a “good investment” during times of inflation.

“They’re the businesses that you buy once and then you don’t have to keep making capital investments subsequently. So, you do not face the problem of continuous reinvestments involving greater and greater dollars because of inflation,” he said during the 2015 Berkshire Hathaway shareholders meeting.

“If you built your own house 55 years ago like Charlie [Munger] did, or bought one 55 years ago like I did, it’s a one-time outlay, and you get an inflationary expansion in replacement capital without having to replace yourself.”

If you want your real estate portfolio to grow beyond your home, you can invest in a residential real estate investment trust (REIT). REITs are publicly traded. They collect rent from tenants and pass that rent on to shareholders in the form of dividends.

Another low-cost option is to buy shares of low-cost exchange-traded funds (ETFs) that focus on real estate. To do this, you’ll need an online investing account. You can find the best discount trading platform through the Money.ca guide.

Gold

While Buffett is known for being uninterested in gold investing — describing it in a 2011 letter to shareholders as an asset “that will never produce anything” — other investment experts consider it a solid hedge against inflation because its purchasing power has remained relatively stable over time.

“The worth of a dollar can be weakened by inflation, but gold provides you with an edge to combat that decrease in purchasing power,” explained Certified Financial Planner (CFP) and CTFA William Bevins, CFP, during a CBS News interview.

You can invest directly in gold by buying it in its physical form, either as bars, coins or jewellery. Or you can use an investing app to invest in the commodity by purchasing shares of gold mining companies. For those looking for more diverse exposure, you can also invest in gold ETFs.

Bottom line

By incorporating non-correlated assets, you create a more resilient and balanced portfolio that can withstand the ups and downs of financial markets.

Sources

1. Moneywise: 'It gave me a big advantage': Warren Buffett and Bill Gates were asked to give the secret to their success in 1 word. They both gave the exact same answer (Sept 6, 2023)

2. LinkedIn: Michael Hood, Co-founder of @Voiceflow

3. CNBC: Warren Buffet Archive

4. Berkshire Hathaway: Shareholder's Letter (2011)

5. CBS: 3 reasons you should invest in gold, according to the pros (April 18, 2023)

— with files from Romana King