Inflation refers to the rate at which the value of money decreases, causing the prices of goods and services to rise. It is a natural part of an economy, but if left unchecked, it can reduce the purchasing power of your money.
One way to counter inflation is through inflation hedging, which involves choosing investments that can maintain or increase in value as inflation rises.
Some investments may appear to provide good returns, but when inflation is considered, their actual value may decline over time.
A smart investor can plan ahead by selecting assets that perform well during inflationary periods. While many investors traditionally rely on bonds for steady income, there are other investment options that offer better protection against inflation.
Here are five of the best investment strategies to safeguard your finances against inflation. These strategies range from investing in stocks and real estate to choosing alternative financial instruments. Each comes with its own level of risk, so it’s essential to understand them before making a decision.
Key Takeaways
- Inflation is a common economic occurrence, but strategic investing can help protect against its effects.
- Shifting some investments from bonds to stocks, especially preferred shares, can be a useful strategy.
- Real estate is known for performing well during inflationary periods, with real estate investment trusts (REITs) being a practical way to invest.
- Diversifying into international stocks or bonds helps protect your portfolio from domestic inflation trends.
- Treasury Inflation-Protected Securities (TIPS) are a government-backed option that adjusts for inflation.
- Investing in senior secured bank loans can provide higher yields while reducing exposure to declining bond values.
1. Invest More in Stocks
When inflation rises, it typically hurts the bond market, but it can boost the stock market. One way to prepare is by shifting some of your investments from bonds to stocks. For example, reallocating 10% of your portfolio from bonds to equities can help take advantage of market trends during inflationary periods.
A common portfolio strategy is the 60/40 mix, where 60% is allocated to stocks and 40% to bonds. One example of such a portfolio is the Dimensional DFA Global Allocation 60/40 Portfolio (I) (DGSIX).
However, keep in mind that while this is a relatively safe investment mix, an all-stock portfolio tends to outperform in the long run due to compounding returns.
Preferred stocks can also be a great choice since they offer higher yields than most bonds and are less likely to lose value when inflation spikes. Another good option is investing in utility stocks, which provide steady dividends and follow a predictable economic cycle.
2. Diversify Your Investments Internationally
Many investors focus too much on U.S.-based stocks and bonds, but this approach can be risky, especially during inflationary times. Investing in international markets can help reduce risk and provide additional protection.
Not all economies move in sync with the U.S. market. Countries like Australia, Italy, and South Korea experience different economic cycles. By investing in stocks or bonds from these regions, you can reduce your exposure to inflation within the U.S.
A simple way to invest globally is through exchange-traded funds (ETFs) and mutual funds. These funds offer a cost-effective way to diversify, rather than buying individual foreign stocks or American Depositary Receipts (ADRs).
If your portfolio already contains S&P 500 index funds, adding an international index fund can improve your overall balance.
3. Invest in Real Estate
Real estate is a strong hedge against inflation because it holds intrinsic value and provides consistent income through rent. When inflation rises, property values and rental prices usually increase, helping property owners generate higher returns.
One downside of real estate is that it is not easily converted into cash (illiquid). A more flexible option is investing in real estate investment trusts (REITs). These are companies that own and manage properties in commercial, residential, and industrial sectors.
REITs typically pay higher dividends than bonds and are less affected by rising interest rates. A well-known REIT option with broad exposure and a low expense ratio is the Vanguard Real Estate ETF (VNQ).
Fast Fact:
Investors new to real estate can consider mutual funds or ETFs specializing in real estate investments. Some examples include:
- Vanguard Global Ex-U.S. Real Estate Index (VNQI): Offers exposure to global real estate.
- iShares TIPS Bond ETF (TIP): Tracks U.S. Treasury bonds adjusted for inflation.
- Lord Abbett Floating Rate Fund (LFRAX): Provides exposure to corporate loans with variable interest rates.
4. Buy Treasury Inflation-Protected Securities (TIPS)
TIPS are U.S. Treasury bonds that adjust with inflation. These bonds are among the safest investments since they are backed by the federal government.
TIPS are linked to the Consumer Price Index (CPI). Their principal value increases with inflation and decreases with deflation. Interest is paid twice a year at a fixed rate based on the adjusted principal amount. These securities come in three maturity options: five, ten, and thirty years.
However, TIPS are sensitive to interest rate changes. If sold before maturity, their value may drop, leading to potential losses. Despite this risk, they remain one of the best ways to protect against inflation.
Fast Fact:
TIPS yields fell sharply after 2018 but surged in 2022 and 2023 due to high inflation, surpassing 2018 levels.
5. Invest in Bank Loans
Some businesses benefit from inflation, particularly banks, which make more money as interest rates rise. Investing in senior secured bank loans can be a way to earn higher returns while minimizing risk.
Senior bank loans typically offer variable interest rates, which means their yields increase when interest rates rise. This makes them a valuable option for investors looking for protection during inflationary periods.
However, these loans do not immediately reflect rising rates, so there may be a delay before their value increases.
An example of a fund that invests in bank loans is the Lord Abbett Floating Rate Fund (LFRAX).
What Are the Best Long-Term Inflation Hedges?
The best hedge against inflation depends on the investment period. Many people believe that commodities, especially gold, are a reliable hedge.
However, research suggests that gold is most effective as an inflation hedge only over extremely long periods—such as a century or more.
Stocks, on the other hand, are often seen as a better long-term hedge against inflation. Historically, corporate earnings grow faster when inflation is high, as it indicates an expanding economy. Over the past 100 years, the S&P 500 has delivered an average annual return of about 10%.
Is Gold a Good Hedge Against Inflation?
Gold is traditionally viewed as an inflation hedge because it is a tangible asset. When inflation rises, gold prices usually increase. However, gold’s price can be highly volatile due to other factors, making it an unreliable short-term hedge.
Can Bitcoin Protect Against Inflation?
Bitcoin is sometimes seen as a digital inflation hedge due to its limited supply. However, its investment history is short, and its price volatility makes it an unpredictable hedge against inflation. For example, Bitcoin’s price fluctuated dramatically in response to inflation-related news in 2021 and 2022.
Can Real Estate Protect Against Inflation?
Real estate is one of the most effective inflation hedges. As property values and rental prices rise with inflation, real estate investors benefit from increasing income and appreciating assets. Additionally, mortgage payments remain fixed, meaning real estate investors effectively pay less over time as the value of money decreases.
Conclusion
Inflation is a natural part of the economy, but it can significantly impact investments. By selecting inflation-resistant assets such as stocks, real estate, and TIPS, investors can safeguard their portfolios and maintain purchasing power.
Being prepared with these investment strategies will help ensure financial stability, regardless of inflation trends.
Join Gen z and millennials TaskForce official 2025 WhatsApp Channel To Stay Updated On time the ongoing situation https://whatsapp.com/channel/0029VaWT5gSGufImU8R0DO30
