Best Investments to Hedge against Inflation



A dollar today is not the same value as it is in 2000 and certainly won’t be the same value as in 2050. This is all due to inflation. Inflation measures the average price level of goods and services. The level of inflation in an economy changes depending on current events. Rising wages and rapid increases in raw materials are the major contributing factors to inflation.


Why is inflation bad?

  • Inflation refers to the increases in prices over a specified period of time. It erodes the money’s purchasing power. As a result of inflation, a specific amount of currency will be able to buy less than before.

    For example, a pound of spaghetti or macaroni would cost consumers $0.8 in 2020 and now it is priced at $1.4. Thus, the same amount of $100 that we used to shop for groceries can no longer fill the cart. 

    “Inflation is the silent wealth killer,” – Chris Berkel, investment advisor and founder of AXIS Financial. 

    The pandemic, the Russia-Ukraine war, and the recent tech companies’ major layoffs are the current episode that put pressure on the cost of goods and services. The price will remain increased as long as consumers demand persists. Inflation is expected to stay elevated throughout the year, the US Federal Reserve is taking a more aggressive stance to tighten monetary policy by increasing the interest rates as an initiative to tame the price increase.



How to Beat Inflation?

Investors should address inflation’s effects by making the most of investment returns by investing in assets that have historically delivered returns that outpace the rate of inflation. It is because if they don’t, it can erode their purchasing power and cut into their returns.


Invest in Combating Inflation.




In constructing a portfolio, it is important to diversify across several different asset classes. It is crucial to aid if any unpredictable stock market conditions occur. 


Investing in a variety of investment mediums is better as opposed to holding onto cash. It will help in lowering the risk of losing monetary value due to inflation. The easiest way to diversify and invest in multiple stocks or investment mediums in a single investment; especially for beginner and novice investors are ETF and Hedge Funds. Experts typically recommend investing in diversified index funds based on broad market indexes like the S&P 500. 


Nobody can predict the future, one can only make an analysis. It is advisable to invest early and consistently. Thanks to the power of compounding interest, the money that is being put to re-invest with result in earning more. 



Here are other excellent investment asset classes to consider in hedging against inflation.

Beat Inflation with Commodities

It is usually the first type of investment that comes across investor mind when looking for inflation hedges. These are raw materials including oil, natural gas, gold, silver, wheat, and many more. 


There are many ways to invest in commodities. It can be traded by purchasing commodity exchange-traded funds, ETFs, commodity stocks, or commodities can also be traded on the futures market; where parties agree to buy or sell commodities at a certain time, and for a certain price, in the future.



Why commodities can act as a natural hedge against inflation?

As inflation increases the prices of goods and services. It is aligned that commodities prices will also increase. Thus, commodity investors can get a good return on those investments. 


On the other hand, commodities can be very volatile. Commodity prices can fluctuate with changes in demand, the dollar’s strength overseas, and natural and political disasters. For example, Russia has been reducing gas supplies through Nord Stream 1 for a number of months. Thus, gas prices around Europe had been enormously high and will continue to rise this upcoming winter. 



Beat Inflation with GOLD




Gold is the oldest investment medium to hedge against inflation. Gold had served an average annual gain of 9.48% in the span of 2001 to 2021. While inflation ranges from around 2.4% to 7% of the same time period. 


Just like any other commodities, you can invest in gold-focused mutual funds and exchange-traded funds (ETFs), futures or gold can also be purchased in a single form of a wafer, bar, and even accessories. However,  there are additional costs in storing and insuring coins and bullion, which might reduce investors’ returns. 


There are also several ETFs option that allows an investor to own physical gold or the stocks of gold miners, which can offer higher benefit if gold prices soar.


It’s still important to remember that the price of gold is highly volatile, especially over the short term.


Commodities are less effective against long-term inflation as commodity prices may soar during high inflation but once the inflation rate begins to subside, those prices could fall fast.



Beat Inflation with Stocks



Investing in stocks is another great way to combat inflation. 


If you invested $100 in the S&P 500 at the beginning of 2020, you would have about $120.14 at the end of 2022, assuming you reinvested all dividends. This is a return on investment of 20.14%, or 6.69% per year. Given with recent continuous rise of interest rate to 3.75%-4% during its November 2022 meeting. One still looking at approx. 3% average annual returns. 


Remember, investing in stocks is never a risk-free ride. You may lose money in the short term and if you decided to invest all in stock index funds, you can’t choose what companies are fund invests in. 


However, a Stocks index fund is still a great investment medium as it can contain hundreds of stocks, with a simple and low-cost diversification model which reduces the headaches of risk and portfolio management.


 If you prefer in keeping your money out of companies you don’t agree with ethically, consider choosing environmental, social, and governance (ESG) companies. 

Maintain Your Investments in Long-Term-Growing Stocks 


Some investments might not suitable to be invest for a short period of time. Thus, always make your thorough research. For example, If you invested $100 in the S&P 500 at the beginning of 2022, you would have about $83.40 at the end of 2022, assuming you reinvested all dividends. This is a return on investment of -16.60%, or -19.57% per year. Adding the inflation, it might seem a hurtful investment. 


Markets are struggling with shifting inflationary pressures and uncertainty. It results in to increase in market volatility  The best course of action in situations like these is to maintain your investment position, preferring long-term. 


Investors who own individual stocks could evaluate their portfolios. If most of the stocks are exposed to inflation; consider paring back that exposure or perhaps not adding to the position further.




Beat Inflation with Real Estate


Real estate might not be an ideal medium for certain investors due to its size of capital. It is still a great way to hedge inflation. An analysis by the Massachusetts Institute of Technology (MIT) found that retail property has proven to be the best category of real estate to beat inflation, whereas apartment buildings and industrial properties did somewhat less well.


The factors such as inflation growth, maintenance costs, and price appreciation are the main items to consider in deciding the type of real estate to invest in. Always remember, real estate is a long-term investment. 


Owning a home can provide a hedge against inflation. You’ll have the potential for its value to increase over time. According to the Federal Housing Finance Agency, U.S. home values have seen a 4% average annual growth in average since 1991. This means you can get price appreciation.


Here are the drawbacks of investing in real estate: It requires big capital and a variety of costs for financing and maintenance. So, for retail investors, you can channel to invest in real estate investment trusts (REITs) can provide a simple way for regular investors to diversify their portfolios and get the inflation hedging benefits of real estate. REITs investment is like buying a fund that exclusively owns real estate assets. Plus, regulations require them to pay out regular dividends. It is a plus point for income investors.

If you consider buying a house as an investment. A fixed-rate mortgage will allows you to maintain the biggest portion of housing expenses at the same payment. Monthly housing payment remains the same. However, it the rate keeps on falling, then floating rate might be more appealing.

Is there a way for Investors to take advantage of Inflation?

The inflation environment is not always bad for everyone. Certain businesses perform better when prices are rising. Financial institutions usually earn better when interest rates rise and they are able to profit off a wider spread on what they charge for loans compared to what they pay out for deposits.


Companies with low capital need able to increase their price to be at par with competitive price advantage. These businesses can maintain and increase their price tag without having to reinvest large amounts of money at ever higher prices.


Investors with lower liabilities should maintain high-risk exposure investment assets while retirees and pre-retirees that depend on their investments for cash flows may need to add fixed-income assets into their plans. 




Bottom Line


Diversifying your portfolio and investing in assets that have traditionally outpaced the rate of inflation is the best way to prepare your portfolio for inflation. Regardless, it makes sense for investors to start plotting their investment plan in making certain money moves now. 



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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.

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