Inflation is when the purchasing power of your dollar declines. This can create difficulties for everyday people, especially those living on a fixed income. But is there a way to create a hedge against inflation so that your budget doesn’t feel so tight?
How to Hedge Against Inflation:
- Blue Chip Stocks
- Real Estate
- Commodity Funds
- Emergency Supplies
There are a number of factors that can cause inflation, but suffice it to say the most common factor is when there is an oversupply of currency. Per the laws of supply and demand, the currency becomes devalued and can trigger rising prices when it comes to goods and services.
Why Hedge Against Inflation
In terms of investing, a hedge is basically a defense against an undesired outcome. When you hedge your portfolio or assets, you are setting up a defensive strategy to deflect or mitigate losses. In the case of inflation, your currency is losing its purchasing power. This means that if you don’t want your net worth to decline, your money should be invested in different types of assets that are more stable or even growing.
How to Hedge Against Inflation:
There are many ways to hedge against inflation risk, a few of the ones we recommend include:
Gold has been used as a currency for thousands of years. Its value is not going to go away, even if people no longer use precious metals to buy everyday things.
Gold has a lower liquidity than assets like stocks and bonds, but it is still more liquid than other assets, such as real estate. During inflationary periods when a fiat currency loses its value, gold often increases in value. This is why many wealthy people and governments store gold in secure locations. In some instances, they can use the gold as collateral for fiat currency loans.
You can store gold on your own property, but there are also many subscription services that will allocate a small portion of your income every month toward gold, silver, or platinum that they will securely store for you. For some individuals, consistent gold purchases are part of their overall retirement planning.
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2. Blue Chip Stocks
Blue chip stocks refer to stocks issued by companies that are large, established, branded, and have a large presence in their respective markets. Think of companies like Coca-Cola, Kraft-Heinz, and Procter & Gamble.
Because most of these companies produce necessary consumer staples, they do particularly well during inflationary periods too. If your retirement account is managed by a stock advisor, there is a decent chance that a large percentage of it is invested in these types of companies.
If you are managing your own self directed IRA, you will probably want to do some piggyback investing and copy the strategies of successful investors who are doing the same thing. All of the biggest holdings in Warren Buffett’s stock market portfolio, for instance, are companies that have a monopoly or near monopoly in their industry—whether its technology or food and beverage.
3. Real Estate
Real estate is also a good hedge against inflation. and sometimes real estate inflation can even work to your advantage.
Imagine there is a money supply of a million dollars and five homes on a marketplace—every home is potentially priced at $200,000, give or take. Now imagine the marketplace is flooded with another million dollars. This essentially means that there’s an opportunity to double the price of each home. As simplistic as this example is, it illustrates how real estate as an asset class is a good inflation hedge. If you’re not already invested in real estate, rising inflation might be the motivation you need to start learning about topics like how to buy my first rental and act on them.
If you own properties already, inflationary times may also play to your benefit. However, there may be times when they do not, at least in terms of cash flow. If you own commercial real estate and your renters are in the entertainment or hospitality space, higher inflation might mean less business at places where consumers spend discretionary income. Even so, the value of your properties will likely increase with the inflation rate. Additionally, inflation expectations generally have rent increases built in, so an inflationary period might be an opportunity to accelerate a rent increase (especially if your maintenance costs are also rising).
It’s a complex issue that involves analyzing a variety of factors, but generally speaking, a financial advisor will tell you that real estate is a solid hedge against high inflation.
If you don’t think you have the know-how to buy physical real estate, or you don’t have the capital to obtain it, then a REIT might be an attractive option. A real estate investment trust is similar to a mutual fund, but instead of stocks, you own a share of a real estate portfolio.
Keeping rising housing market prices in mind, REITs can do very well during inflation. In the digital era of apps and peer-to-peer platforms, you can buy into one right from your cell phone. Many of them only require $500 or $1000 to get started, which is a very low investment threshold compared to buying a property yourself.
Additionally, you won’t have to do any of the property management or marketing. Many REITs yield a solid growth of 8-12%, and in addition to that, they pay dividends as well from the rental income.
TIPS is short for Treasury Inflation Protected Security. It is a type of bond with a value tied to an inflationary gauge called the Consumer Price Index or CPI. This index tracks the prices of goods and services that people typically need. As the prices increase (in other words, as inflation increases) the value of the TIPS increases as well.
These types of bonds were specifically created with the idea of protecting assets via an inflation hedge. Other types of bonds do not fare as well during inflation because the real return of a bond is often fixed. And since the purchasing power of money is on the wane, this means that any future returns the bond might yield are also diminished.
A side note about bonds in general—they are essentially certificates of debt that show you have lent money to the government or a corporation. There are federal, municipal, and corporate bonds available for purchase, though each one has a different degree of risk involved. Generally speaking, government bonds are less risky outside of inflation-related issues. As a hedge against unexpected inflation, treasury inflation protected securities are considered an evergreen asset to hold.
6. Commodity Funds
It can be hard for the average retail investor to buy and sell commodities, both because the marketplace is not extremely accessible or easily navigated, and also because it’s extremely volatile. A better option is to buy into commodity funds, which can be bought, sold, and held through trading apps and brokerage platforms.
A commodity is a basic material, many of which go into the supply chain of secondary or tertiary items. Think raw materials like gold, which might go into a semiconductor and microchip, or oil, which will be made into gasoline. During inflationary periods, the price of raw materials often increases. An oversupply of money can also lead to speculative investment in certain commodities, which can drive up the price. Either way, the price of raw goods increases, meaning investors who put their cash into these asset classes can see some sweet returns.
Learn more about the various types of portfolio management strategies, including commodity investing, by signing up for a free Infinity Investing membership.
By now you’ve surely heard of the digital coinage called cryptocurrency. This currency is not tied to any government or central bank, and its accounting ledger is completely decentralized along the blockchain.
In addition to the popular coins like Bitcoin and Ethereum, there are hundreds of other cryptos that are bought and sold on cryptocurrency exchanges. While inflation eats away at the purchasing power of the dollar, many of these cryptos have risen in value, outpacing even the hottest stocks on Wall Street.
The crypto market is still very new, unregulated, and mostly unproven, so it can be difficult for the average investor to know how to trade cryptocurrency. However, many banks and investment firms are beginning to package crypto investments into their retirement plans, and applications like Coinbase will even pay you in crypto to learn more about it. These trends are making crypto more accessible to the everyday investor.
8. Emergency Supplies
Our last point relates not to the different inflation related investments you can make, but rather what you can do right at home as a hedge against inflation.
As mentioned, inflation has some very practical consequences that many everyday people are seeing right now. Gas prices alone have doubled or tripled in most parts of the country, and some food items are seeing double digit percentage increases. For someone on a fixed income, this is disastrous.
One way to deal with inflation is to stock up on everyday items during times of low inflation. If you can supplement your household’s weekly food allotment with things like canned goods, rice, and frozen meats and vegetables, you won’t have to spend as much money every week at the grocery store when grocery bills have doubled. The same strategy may not apply to gas, but there are things you can do, such as carpooling or swapping out the lightbulbs in your home for LED lights, that can go a long way.
Every penny counts right now, especially when each penny is worth 10% less than it was the year before.
You Can’t Control Inflation, But You Can Hedge Against Inflation
The rising interest rates, commodity prices, and costs of goods and services are taking many consumers and retail investors by surprise. And while there isn’t much you can do to bring costs down in the near future, there are ways to balance your investments against them.
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