The severe inflation of recent years has altered the relative attractiveness of various classes of investment assets. It has also made it far more difficult for investors to realize a positive real after-tax return. At very high levels of inflation, only one of the following three investment strategies actually preserves wealth.

(1) Even if a portfolio of interest-bearing securities pays three per cent above the rate of inflation, its real after-tax return to an investor in the 40 per cent tax bracket falls from 1.8 to 4.2 per cent as inflation goes from zero to 15 per cent.

(2) Assume that a portfolio of tangible assets—precious metals, gems, real estate, commodities and collectibles—appreciates one per cent per year faster than the inflation rate. An investor in the 40 per cent tax bracket will be taxed on 40 per cent of his capital gains when he liquidates. His real after-tax return will exceed that of the first investor’s when inflation exceeds five per cent, but will nevertheless be negative at higher rates, dropping to 1.56 per cent at 15 per cent inflation.

(3) If an investor borrows double the amount of his own funds at two per cent above the rate on securities and buys tangible assets, his real return will rise as the inflation rate rises. At inflation rates above 10 per cent, his levered portfolio provides the highest return of the three strategies, and at rates above 11 per cent actually provides positive real after-tax returns.