How to protect yourself from inflation
There have always been two things you can’t question: taxes and death, but perhaps it’s time to add a third to the list: inflation, especially for people living in advanced economies. The level of inflation is constantly changing, and its rate depends on current events such as rising wages and rapid increases in raw materials such as oil and so on. But in general, governments will try hard and will use extreme measures to keep the inflation rate positive. In this article, we’ll look at how you can protect yourself from inflation.
hedge against inflation
When it comes to protecting yourself from inflation, the most straightforward strategy is to invest in commodities that tend to hold their value regardless of changes in the economy. Gold is the most popular commodity when it comes to this strategy due to the fact that it has held its value significantly over the past 100 years.
Many other strategies are to invest in certain types of asset classes that tend to perform better than others and are therefore more likely to outperform the market in the event of inflation.
With these two strategies in mind, let’s take a look at a more detailed list of useful asset types that will help you figure out how to protect yourself from inflation:
Gold
As mentioned before, gold is a good option when it comes to protection against inflation. Partly this is because there are so many people who flock to buy gold when inflation is high, but another major reason is that the metal has had a remarkable ability to maintain its value over the past few decades.
Goods
Commodities is a very broad asset class that includes many different types of investment. Investing in commodities can mean investing in grains, precious metals, electricity, oil, beef, orange juice, natural gas, as well as foreign exchange, emissions, and some other financial instruments.
Commodities can be a good way to protect yourself against inflation because of the unique relationship that exists between the price of commodities and the rate of inflation. If the price of commodities goes up, it is very likely that the rate of inflation will go up soon too.
From an investment perspective, this means that inflation is already ‘priced in’ relative to commodity prices. But be sure to take a lot of caution when choosing this asset class, as it is usually very volatile.
Stock/Bond Portfolio 60/40
Even if you’re new to investing, you’ve likely heard that a 60/40 stock/bond portfolio is a fairly stable arrangement. This combination of assets is considered traditional as it offers a relatively low level of risk while providing an acceptable return.
This investment can be effective for protecting yourself against inflation in the long term, as it tends to include stocks from large companies, and can provide a good level of stability as long as you are willing to leave your money in the portfolio during short-term periods of high inflation.
Real estate investment funds
Real estate investment trusts or 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 rent paid on their properties.
Since rents tend to rise along with the general rate of inflation, REITs also tend to be profitable in times of high inflation. Although investments in REITs must rise in value in times of inflation, you have to be careful, no investment is 100% safe from inflation.
S&P 500 index
The S&P 500 is a favorite among novice and experienced investors alike, because it is a good way to protect yourself from inflation. In general, the companies that benefit from inflation are those that require little capital, while those that deal with natural resources are the biggest losers. Currently, the S&P 500 contains a high concentration of technology and telecommunications services companies (35% of the stocks in the index), which are considered to be undercapitalized companies.
Income from real estate
Last on the list of how to protect yourself from inflation is real estate. Buying and renting real estate can be a good way to beat inflation. This is because, as inflation rises, so does property values, as does the amount a landlord can charge for rent.
You will be required to manage the property which is not an easy task but if you are looking to diversify your way through an inflationary period then this can be an effective method.
Although inflation is a sure thing, you don’t have to let it erode the value of your investments. Just make sure that you are investing in the right asset classes that will enable you to protect yourself and your money regardless of the inflationary environment.
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