Inflation hits, and it hits hard. Those who have experienced inflation tell tales of a time when all their money meant nothing, money is technically worthless, and you can only buy so much with it. Those who got smart made the right investment moves, including getting the assets that could survive the economic collapse, watched their wealth grow, and became even richer after the dust settled.
Real assets are a good solution for creating income and hedging your wealth against inflation. The biggest upside to holding real assets like real estate and others is that they offer a higher yield similar to credit markets with the distinction of moving with inflation instead of getting reduced by it.
Inflation-hedged asset classes will outperform most markets in an inflationary economy. The grip of inflation feels cozy at first, and you get complacent enough not to make the suitable investments and think that it’ll pass and things aren’t as bad. Hedging your portfolio with the right assets, striking early, and investing in inflation-proof assets is your best bet.
But first, you need to be aware of what each asset class is about and how it hedges your wealth against inflation. As a rule of thumb, when considering assets to hedge against inflation, assets that increase in value as tied to inflation are a good buy. This includes assets whose real return is a better value than the rate of inflation. Also, securities with interest rates paid according to inflation are good enough.
Some prominent inflation-proof assets include:
Gold & silver
Along with other precious metals, gold and silver are many people’s go-to assets to hedge against inflation. Buying silver gives you a slight advantage because, unlike gold, it is not hoarded by its owners worldwide. Its limited supply hints at an increase in value as the supply of the metals continue to thin out over time. With both metals as part of your arsenal against inflation, you get enough backing to hold your money and make a profit if it increases in value.
Gold is stable as a physical asset that has held its value over a long time. Gold has enjoyed a steady value and even climbed the ladder as an alternative currency in some cases. However, there’s a caveat to gold; as inflation rises, the central bank will increase the interest rates, making non-yielding assets like gold particularly uninteresting, especially with higher interest rates. Think of gold as more of a long-term hedge against turbulent economic turns rather than a quick in-and-out strategy to survive inflation.
Commodities
They come in diverse classes, from grain and beef to precious metals and oil to foreign currencies and natural gas. Commodities are easily a harbinger of inflation. As their price rises, the products from those commodities also increase in price. Investing early and directly in commodities or a business that deals with these commodities mean more money for you when the purchasing power nosedives and prices of goods start rising.
Commodities, however, face a slight uncertainty; in case of An imbalance of the demand-supply equation, whether through inadequate supply from geopolitical factors or supply chain disruptions could influence the volatility of the commodity. The easiest way to get started on investing in commodities is through ETFs.
Positive cashflow Real estate
The income earned from real estate is directly matched to the level of inflation. As inflation keeps rising, property value also increases, meaning that landlords and property owners also increase their charges. People will need homes and apartments to live in, even as rent keeps rising. A higher rental income helps you brace the impact of inflation and expand your wealth as an investor.
There’re a few things to watch out for when it comes to real estate:
- Transaction costs for purchasing real estate are considerably higher.
- As an illiquid asset, you cannot quickly sell the property without incurring a significant loss in value.
- To keep and maintain the property at a good value, you have to fund the management and maintenance of the same property. This would involve attracting a considerable financial and legal investment in it-and that might not come cheap.
When hunting for investment-proof assets in real estate, consider property whose monthly rental income is enough to handle the expenses and maintenance needs and still have a little left over for you. As an appreciation-oriented real asset, cash flow real estate is subject to asset appreciation, meaning that if the market goes well, the value of the property will appreciate over time, assuming you take the necessary measures to maintain it.
For some time now, more investors have opted into REITs. Real Estate Investment Trusts (REITs) are the best alternative to buying actual property. REITs comprise publicly traded property portfolios; they can be termed securities, but their value relies immensely on the real estate market trends.
Treasury Inflation-Protected Securities (TIPS)
Generally, bonds have a mucky relationship when hedging against inflation because of their infamous fixed Rate of interest regardless of their lifespan. TIPS are government bonds with interest rates tied to the inflation trend; they rise and fall with inflation and deflation, respectively. They work like bonds where you lend money to the government, which pays you, the investor, back with interest.
TIPS are indexed to inflation, making them perfect for when you need to balance out your fixed income or flesh out your bond portfolio. The federal government backs TIPS; this is a good sign when the safety of your investments is crucial, and you are also shopping for a sound retirement income source. The stability of TIPS comes from its relationship with the consumer price index.
This makes them stable enough against unexpected flash inflations from price spikes. Despite having a fixed interest rate, the principal value of the bond is adjusted as determined by the CPI, meaning that a higher CPI is a higher interest rate and more money for you when you redeem your bond.
These TIPS bonds typically pay interests twice every year at a fixed rate, usually after 5-, 10- and 30-year maturities, during which the higher of your adjusted or original principal is paid to you. However, it is worth noting that TIPS hugely boosts your portfolio in the case of unexpected inflation. If inflation is expected, then the current yields will already have factored that into the applied rates.
Stocks
Stocks are your ownership stake in a business. Inflation ushers in price increases for various goods and even services; this tends to increase the company’s revenue providing the product or service. A higher revenue translates to a rise in stock prices. Historically, stocks tend to run well alongside the fast-paced inflation rise. However, the downside is that stocks do experience a higher volatility risk. If you choose to invest in shares, you should be comfortable with the volatility.
Historically, the stock market has survived inflation with higher share prices for companies whose goods rise in prices. Some stocks to protect from inflation are technology and growth stocks. Stocks of consumer goods-based companies also do well, but there is no guarantee the value will rise, and you will still have to brace the sudden price changes.
Choosing the best one will depend on several factors when looking for assets to invest in to beat inflation. Whether it be your forecasts or the amount of money you have and the risk involved, each factor could mean overnight sensation and significant earnings followed by severe losses and a portfolio with assets that stagnate in value. Always take time to research and plan before buying.
Read more options for investing read Investing in Real Estate: Forestry, How to Research Investments that are Right for You, and Do This Before Investing. This post was written with by Willy Wallace on Fiverr. I partner with Fiverr writers who are specialists in the topics they write about. These writers provide real world details to help you make better decisions. Neither of us are financial advisors, he’s a business and economics writer and I’m a sales gal, the best help for making financial plans is working with a financial planner and doing your own research before investing.
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