Editorial StaffInflation can be a scary thing. It’s hard to know what will happen in the future, and inflation is often unpredictable. Imagine if your purchasing power were diminished by 50% in one year.
There are many ways that you can protect your money against it, whether by investing it wisely or planning for the rise in inflation with inflation-resistant assets that will be a hedge against inflation.
Many people believe that inflation is inevitable, especially in countries where the currency has lost so much value due to increasing the money supply or “money printing.”
Investing can be a stressful concept in an inflationary environment since inflationary periods can cause your investment strategy to change rapidly. Having too much cash over long periods can be detrimental as well as investing in high “growth potential” options.
Which asset class should you invest in?
In this blog post, we’ll explore 15 different ways you can help protect your money from inflation so it doesn’t eat away at your savings and you can make intelligent decisions to outpace inflation.
1. Gold and Other Tangible Assets
One of the most popular inflation-proof asset classes to invest is in tangible assets like gold and silver. These metals cannot be printed by a government, they don’t rot over time, and they retain their value much more easily than other investments which can quickly lose their worth with inflation.
Gold is a good hedge against inflation. If inflation occurs, the value of gold will rise because people want to trade their devalued cash for something that won’t lose its worth like metal coins with intrinsic value. An asset class that cannot be created by government decree is usually a good hedge against rising inflation.
2. Commodities
Another inflation hedge investment as inflation rises is in commodities. Commodities are essentially raw materials that have future value, so they will often rise when inflation occurs because the cost of production increases while simultaneously decreasing their supply.
Commodities include oil and gas for fuel, food like corn or soybeans to feed livestock, metals like copper or aluminum used by manufacturers to create other products, gold, and silver as discussed above, and wood pulp for paper making which has many uses across lots of industries, cotton fiber/linen fabric used by clothing makers, etc.
Most tangible things are used to power our health care systems, build real estate, and anything we eat as commodities. The investment returns on commodities can be substantial especially if prices tend to be rising and the overall counter-wide or global financial situation worsens.
3. 60/40 Stock/Bond Portfolio
60/40 is a well-known investment mix that includes 60% stocks and 40% bonds. It reduces inflation risk by including both inflation hedging assets like precious metals, commodities etc. as well as treasury bonds which are often inflation-protected themselves.
This type of portfolio can be very low maintenance when an investor chooses to buy index funds instead of only investing in mutual funds because they will automatically track the market average for them without having to actively trade daily or weekly depending on whether you choose individual indexes or ETFs (exchange-traded funds).
4. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts are a type of security that holds investments in real estate property. They can be publicly traded on stock exchanges and will often pay dividends as well as offer inflation-protected rental income from tenants who have to continue paying rent even if inflation occurs because it’s the cost of doing business for them.
REITs do come with some risks though– what happens if there’s a natural disaster like an earthquake or hurricane which damages properties held by these REITs? Even the most prudent in risk tolerance cannot predict the forces of nature let alone external market forces.
This is why investors should diversify their portfolio with different asset classes too so they don’t lose everything when something unfortunate does occur, but also partially because you want different types of assets to protect against inflation since one alone can be extremely volatile over a decade or longer period of time. Best to know your risk tolerance and act accordingly.
5. S&P 500 ETF
An inflation-proof way to invest in stocks is through an S&P 500 ETF. The S&P 500 index consists of the biggest, most liquid companies on the American stock exchange and this type of fund will track their performance so you can expect inflation protection as long as they exist.
This includes inflation hedging assets like commodities since many large manufacturing firms are included in this index too along with other types of businesses which also see inflation increase costs over time.
The only drawback to investing in a general market ETF or mutual fund instead of individual stocks that hold REITs for example is diversification– what happens if all those stocks go down together? How much money will be lost if that happens?
6. Real Estate Income Through Renting Out A Home
Investing in a home to rent it out is inflation-protected because inflation will cause the cost of new construction and materials used by contractors to rise. We’ve definitely seen this before with property values.
Homeowners can reduce expenses by renting out their homes and put that extra money into something that can be a hedge against inflation. This side hustle and real estate, in general, is something I’ve been doing for years and is important to a diversified portfolio.
This allows rental income to be invested in inflation hedging assets like precious metals.
7. Leveraged Loans
A leveraged loan is a type of asset-backed security that’s inflation-proof. These are typically used for commercial real estate investments and the interest rates will adjust according to inflation and is better than a fixed rate of interest.
This loan is typically given to a company that has significant debt already so be sure your investments are not heavily weighted in this category.
8. Treasury Inflation-Protected Securities (TIPS)
An inflation-proof investment for those who want to invest in long-term inflation hedges instead of short-term ones is investing in treasury securities. These are bonds issued by the US treasury and will adjust their interest rates according to high inflation so you can be sure that inflation doesn’t eat away at your return on investment over time like it does with normal paper currency or savings accounts which earn little extra money over time because inflation takes its toll even if all other factors remain constant.
TIPS work best for people looking to hedge against inflation.
9. Stocks
Stocks are inflation-proof because high inflation will cause the price of goods to increase which means companies can charge more for their products.
However, this is only true if the company in question manufactures or provides a service that people still need when they are in an inflationary environment.
Putting too many resources into any single stock could be very risky but at least you’ll lose out on some returns during times of deflation since inflation-proof assets tend to rise faster than investments that don’t protect against inflation as stocks do.
10. Cryptocurrency
The inflation-proof nature of cryptocurrency works in the same way as stocks– inflation will cause prices to increase so companies can charge more for their goods which means people are willing to pay.
However, since cryptocurrencies are fairly new and not backed by anything at this point it’s better if they make up a small portion of your portfolio instead of trying to go all in with one coin unless you have enough money lying around where losing some won’t hurt too much.
A lot of corporate investment portfolios have started to include crypto because let’s face it, inflation matters.
Personally, I have a small bit of Bitcoin and Ethereum.
11. Short Term Bonds
Short-term inflation hedges like short-term bonds will adjust according to inflation so investors won’t lose out on money over time due to inflation eroding their savings.
The downside is that they don’t protect you against deflation which means if all other factors remain constant, your investment may not grow as quickly or at all even if inflation occurs since it’s too small of an amount invested for the contract terms.
Also, in the short term, you’ll want to make sure you have a fully-funded emergency fund even during inflationary periods.
12. High Yield Bonds
These are inflation hedges that adjust according to inflation through the same mechanism as short-term bonds. However, they’re riskier because you have to invest more money for a longer period of time.
13. International Bonds
The bond market and international bonds will adjust according to inflation which means inflation won’t eat away at your return on investment over time.
However, there is no deflation protection so you risk losing out completely if market factors drop faster than inflation does or all other factors remain constant and inflation occurs but doesn’t rise as high-interest rates rise on the bond. This can cause bond prices to fluctuate. This is why it’s best to keep different asset classes in your retirement accounts.
14. Review Debt Balances
I recommend not having any unsecured debt. Unsecured debt such as a credit card can really put you behind financially especially if you have a fixed income.
Secured debt, like that of an investment property, can be an effective inflation hedge. The inflation protection you can receive by owning real estate is great even on a fixed income.
If you have a 30-year fixed mortgage and the consumer price index (inflation) is increasing you will be making the same payment each month on less expensive debt. That’s a win-win because a dollar today is worth a lot less than a dollar 30 years from now. This is one of those financial instruments that most people know about but not why it’s important.
15. Equities
Inflation hedges like equities will adjust according to inflation so investors won’t lose out on money over time due to inflation eroding their savings.
The catch is that they don’t protect you against deflation which means if all other factors remain constant, your investment may not grow as quickly or at all even if inflation occurs since it’s too small of an amount invested for the contract terms and what happens when there are no dividends being paid out because companies are just struggling financially instead?
Conclusion
There are all ways that can protect you against inflation.
Even though there is no way to avoid inflation completely, having a diverse investment portfolio of hard and soft assets helps hedge against different types of risks while also protecting against inflation.
You don’t want to be relying on a meager social security benefit when your money is losing value each and every year.
Investing in these assets will help you beat inflation and be in a better position financially.
This article originally appeared on MaxMyMoney.org and was syndicated by MediaFeed.org.
