There are two certainties, as the old saying goes – death and taxes. But perhaps we should add inflation to that list, at least for people living in developed economies.
One of the most reliable economic facts of the past few decades has been that a dollar today is worth more than it will be in ten years’ time.
The level of inflation is always changing, of course, and its rate depends on current events. For example, rising wages and rapid increases in raw materials, such as oil, are two factors that contribute to inflation.
But in general, governments will try very hard (and use extreme measures) to keep the rate of inflation positive.
That’s because inflation encourages investment. So if the money in your bank account will be worth more in a few years-even if you don’t do anything with it- it makes sense to leave it there, right?
Sadly, that’s not the case. So in this article, we’ll look at how you can protect your money against inflation.
Hedging Against Inflation
When it comes to protecting yourself against inflation, the most straightforward strategy is to invest in commodities that tend to hold their value, no matter what the economy is doing.
Gold is the commodity most often used in this way because of the fact that it has held its value remarkably well over the past hundred years!
There are other strategies, though. Certain types of asset class tend to perform better – and are therefore are more likely to outperform the market – when inflation is occurring.
Because of this, investors can plan for inflation by investing in asset classes that tend to outperform the market during inflationary climates.
With these two strategies in mind, let’s look at a more detailed list of the types of asset that are good for protecting yourself against inflation:
Invest in Gold
As we’ve mentioned before, gold is a good option when it comes to protection against inflation, not just because so many people flock to buy gold when inflation is high.
It’s partially due to that; however, the metal has had a remarkable ability to keep its value over the last few decades.
Read our detailed article on: How to Invest in Gold in 2022 to learn more about this commodity and the better way to invest in it.
Commodities is a very broad asset class that includes many different types of investment. Investing in commodities can mean investing in grain, precious metals, electricity, oil, beef, orange juice, and natural gas, as well as foreign currencies, emissions, and certain other financial instruments.
Commodities can be a good protection against inflation because of the unique relationship existing between the price of commodities and the rate of inflation.
If the price of commodities rises, it’s very likely that the rate of inflation will shortly increase, since the price of goods that are used to measure inflation will also increase – because they are made from commodities.
From an investment perspective, this means that inflation is, to some extent, already “priced in” to commodity prices. Just be careful with this asset class, because it can be highly volatile.
A 60/40 Stock / Bond Portfolio
Even if you are new to investing, you’ve probably heard that a 60/40 stock / bond portfolio is a fairly stable arrangement.
This mix of assets is traditional for conservative portfolios because this mix offers a relatively low level of risk, while still providing an acceptable return.
It can also be a good hedge against inflation, at least in the long term. Because this kind of portfolio tends to include stocks from large companies, it can provide a level of stability as long as you are willing to leave your money in the portfolio during short-term spikes in inflation.
Real estate investment trusts (REITs) are companies that own and operate income-producing real estate.
They are private companies that can be invested in through the stock market, but they generate most of their income from the rent paid on their properties.
Since rents tend to rise alongside general inflation, REITs tend to be profitable at times of high inflation. In principle, this should mean that investments in REITs should rise in value during times of inflation, but be careful.
There are many REITs, and in order to use them in this way you should ensure that you invest in a broad range of them, or use an ETF like the Vanguard Real Estate ETF (VNQ) that does this for you.
The S&P 500
The S&P 500 is a favorite among beginners and experienced investors alike, and that’s partially because it’s good at resisting inflation.
And that might be more true now than at any point in the past. In general, businesses that gain from inflation are those that require little capital (whereas businesses that are engaged in natural resources are inflation losers).
Currently, the S&P 500 has a high concentration of technology businesses and communication services.
(They account for a 35% stake in the Index.) Both technology and communication services are capital-light businesses, so, in theory, they should be inflation winners.
Income from Real Estate
Finally, take a look outside the stock market. Buying property and renting it out can be a good way to beat inflation. This is because, as inflation rises, so do property values, and so does the amount a landlord can charge for rent.
Of course, managing a rental property – and making sure you are charging the appropriate rent – requires more work than buying stock. But if you are looking to diversify your way through a short-term inflationary period, this can be an effective way.
The Bottom Line
Though inflation is all but certain, you need not let it undermine the value of your investments. By using a platform like Wealthface to invest in assets that do well against inflation, you can ensure that the value of your portfolio long into the future, no matter what the inflationary environment is.