Forget Gold: These Assets Are Your Best Bets as Inflation Hedges

If your annuity pays a fixed $3,000 per month for life, and inflation increases 12%, the buying power of your annuity payments decreases to $2,640. Variable annuities that adjust with interest rates may offer better inflation protection than fixed annuities. The reason is that these investments pay a fixed rate of interest throughout their years- or decades-long lifespans. Their prices on the secondary market might change, but the interest rate they pay is typically not adjusted. It’s a tangible asset, and those tend to hold their value when inflation reigns, unlike paper assets.

Over the past 10 years, the iShares TIPS Bond ETF, which tracks a TIPS index, posted average annual returns of just over 3%. Your long-term investments will need to earn at least 3.7%, the average U.S. inflation rate going back to 1960, to keep from losing ground. Here’s a look at investments that have stood the test of time in helping investors combat inflation. Commodities, such as oil and corn, are another popular inflation hedge. Logically, when money loses purchasing power, the price of goods, including commodities must have risen.

The following charts show the impact of an inflationary shock in year 1 (left-hand chart) and the impact of a more persistent shock over years 1-3 (right-hand chart) on nominal forecasted commodity returns over time. We can see how commodity prices (represented by the green and red lines) tend to respond quickly to the shocks, but only for as long as the inflationary pressures remain. After inflation subsides, commodities tend to act as a drag on returns, relative to holding a diversified portfolio of equities and bonds.

Treasury securities are debt instruments taken out by the U.S. government (other nations also issue their own bonds), and they pay interest and also return the principal. Treasuries are popular as investments because they retain a high credit rating and because they generate a consistent income for their investors with a near certainty that they will not default. Retirement investors often increase the percentage of bond holding in their portfolios relative to stocks because you will not lose principal owning a bond if you hold it to its maturity. Consumers and investors need to take inflation into consideration, and may want to hedge against inflation.

REITs must also pay property taxes, which can make up as much as 25% of total operating expenses. If state or municipal authorities decided to increase property taxes to make up for their budget shortfalls, this would significantly reduce cash flows to shareholders. Finally, while REITs offer high yields, taxes are due on the msci emerging market index today dividends. The tax rates are typically higher than the 15% most dividends are currently taxed at because a high percentage of REIT dividends are considered ordinary income, which is usually taxed at a higher rate. Choose an investment strategy that’s likely to give you a return that at least keeps up with the inflation rate.

For example, if you invest in a stock that gives a 5% return, but inflation is 6%, you are losing that 1%. Assets that are considered an inflation hedge could be self-fulfilling; investors flock to them, which keeps their values high even though the intrinsic value may be much lower. The cost of goods across industries is rising, leading to broader concerns about inflation and whether people will struggle to purchase the items they could afford in the past. But there are financial moves consumers can make to hedge against inflation.

However, a variable rate annuity may be a good hedge if the benchmark rate fluctuates alongside inflation. Certificates of deposit (CDs) will also underperform during times of high inflation as the interest rate will either turn negative or diminish significantly in real terms. The fact that funds are locked, which is the case with most CDs, makes it even more painful for the investor as the funds will remain exposed to inflation until the lock-up period expires. Alternative investments are an ample group of heterogeneous assets whose performance and volatility can be unique. This makes it difficult to categorize them all as plausible inflation hedges. The best way to hedge against inflation is to invest in assets that maintain their value—or increase in value—over a specified period of time.

How gold can help investors battle inflation now

The bitcoin price remains far above its pre-2020 highs but is struggling along with the price of … [+] ethereum, XRP and other major cryptocurrencies in the face of Federal Reserve tightening. The Fed began the laborious task of shrinking its swollen near-$9 trillion balance sheet in the spring of 2022 following huge expansion though the Covid-19 pandemic and economically disastrous lockdowns.

  • The rising price of goods and services has been one of the inescapable realities of the COVID-19 pandemic.
  • The general rule of thumb is to keep cash, or cash equivalents, available to cover between three and six months of expenses.
  • Let’s say that Henry has a portfolio of Treasury bonds yielding 2.5% a year and some high-quality stocks.
  • ETNs and ETCs are debt instruments (as opposed to shares) but can be bought and sold on an exchange like ETF shares.
  • They range from equities to debt instruments to alternative investments.

Since interest rates often rise during inflationary periods, longer dated fixed-income holdings are likely to lose value faster than those that are longer term. Further, shorter-dated fixed-income holdings can be reinvested at higher rates as they mature, which provides another advantage to shorter-term fixed-income securities as rates move higher. Individual investors, especially those who have long-term investment plans, should think about how inflation fx brew forex broker review will affect their investments. That may mean dedicating a portion of your portfolio to inflation hedges or choosing a more aggressive asset allocation to help increase returns. Creating a diversified portfolio of stocks from other countries can protect investors from the declining purchasing power of money in the US market. None of these strategies is risk-free or guaranteed to beat the rate of inflation or completely counter the effects of rising prices.

One of those strategies is to invest in real estate, especially when mortgage rates are low, as they are now. Look for long-term investments that earn at least 3.7%, the average U.S. inflation rate going back to 1960. You should also diversify your portfolio—especially by owning assets that have historically outpaced the rate of inflation—to help protect against potential losses. The chart below breaks down the inflation-hedging properties of major asset classes based on their forecasted 10-year real returns (y-axis) and ‘inflation beta’ (x-axis). Inflation beta measures the relative sensitivity of an asset to changes in inflation. Unlike correlation, which only captures the similarity in direction between an asset’s returns and inflation, inflation beta captures both the direction and the magnitude of their co-movements.

Using inflation-proof investments

Instead, assigning gold with a certain percentage of the total portfolio is the best way to use its hedging capabilities to protect one’s holdings against the loss of purchasing power. Let’s say that Henry has a portfolio of Treasury bonds yielding 2.5% a year and some high-quality stocks. There are many variables in an economy that contribute to inflation, however in a nutshell, prices tend to go up when the remote graphic design jobs craigslist jobs, employment demand for goods and services is more than the economy supplies. On the opposite, prices tend to go down when the economy supplies more goods and services than people want or need. The percentage variation in the index between a given period and the immediately preceding period is typically interpreted as the inflation rate. Investors looking to speculate in the gold market can trade gold futures contracts.

If inflation reappears, investments in stock will enjoy an advantage while the bond market will suffer since it earns a fixed income all throughout. Stocks hedge against inflation in two main ways, i.e., stocks pay a dividend, and they grow over time. As companies grow their net revenues, they also increase the dividends distributed to shareholders, which assures investors higher cash flows in the future. To avoid inconsistencies in the value of their investments, investors go for stable investments that maintain or grow in value during periods of inflation. For example, real estate is considered a good inflation hedge because the rental income and the market value of real estate properties tend to maintain or increase during inflationary periods. With the price of goods and services spiking in 2021, investors may be seeking ways to perverse the purchasing power of their portfolio.

A disciplined investor can plan for inflation by cultivating asset classes that outperform the market during inflationary climates. Although traditional bonds are the usual go-to for the income-oriented, they aren’t the only investment that produces a revenue stream. When inflation rises, it can cause headaches for consumers and businesses. For consumers, it can lead to higher prices and decreased purchasing power. A possible downside is that a REIT may be concentrated geographically, which opens the door to other risks.

MoneyWatch: Managing Your Money

Consider exposure to such sectors, either by investing in specific stocks or sector specific funds or ETFs. One option is to purchase assets whose value tends to be tied to inflation. Another is to invest in securities specifically designed to hedge against inflation. For example, some bonds will pay an interest rate partially based on the rate of inflation. Several strategies are available to investors to mitigate the impact of inflation on their investments, such as diversifying their holdings, selecting various asset classes, and identifying higher-yielding options.

Invest in the Stock Market

Selita notes that inflation makes it cheaper to service — that is, pay — some types of debt, as long as it has a fixed interest rate. In the same way that inflation eats away at the value of your cash, it also eats away at the value of your loan. This benefits individuals that have acquired loans or mortgages in the past, before the period of inflation set in.

What It Means for Individual Investors

Another precious metal, silver, may be a better asset for hedging against inflation, Koesterich wrote. Silver has more industrial uses than gold, being used in the production of electronic devices, electrical systems and solar panels. With more demand for silver, the metal stands to rise higher than gold during times of inflation, according to analysis from Morgan Stanley. So if gold isn’t recommended as a primary inflation hedge, how can you protect your portfolio’s purchasing power? While Bitcoin has experienced increased adoption, its volatility and relatively short track record cloud its status as an inflation hedge, according to Koesterich. Holding equities in your portfolio in retirement offers some protection, because they have proved to outpace inflation over the long haul.

There’s no one-size-fits-all solution for hedging against inflation

Second, it can be easily counted and it is easily divisible (one Bitcoin unit can be divided into 100 million satoshis). Finally, the Bitcoin network — the one powered by the BTC token — is considered durable. One alternative that seems to stand out at the moment are digital assets like cryptocurrencies, i.e., Bitcoin. This group includes venture capital, private equity, fine art, fine wine, cryptocurrencies, and even structured debt products.