Investors are always paying attention to inflation. Even under the best of circumstances, we know a dollar will lose value over time. This is why we seek assets to hedge against the effects of inflation.
A good inflation hedge is an asset that maintains its value over time. Some hedge assets are even known to increase in value in response to inflation. With the right hedge investments, you can offset the dollar’s gradual loss of purchasing power.
With inflation recently reaching a 40-year high, interest in hedge investments has spiked. Investors are concerned about the loss of value the dollar is experiencing. This will lead many to look for different assets to protect against inflation.
Here are six assets investors can use to hedge against inflation.
Commodities
Many investors favor commodities as an investment hedge. Commodities cover a wide range of assets including wheat, oil, rice, gold, pork, or currency. Commodity prices and inflation are usually related. As inflation increases, so do the prices of most commodities. With that said, swings in supply and demand can make commodities volatile at times.
Most investors would not invest in commodities directly. It would be impractical for most people to buy barrels of oil or huge reserves of grain and then find sellers. Instead, it is more practical for people to invest in futures contracts or trade ETFs. You might even consider buying stock in companies that handle or produce various commodities.
Investors often rely on analytics services like ArrowHead to gain valuable insights and enhance their decision-making in complex commodity markets. These consulting firms and software analytics companies specialize in constructing joint probability distributions, statistical models that assess the likelihood of multiple events or variables occurring simultaneously.
For instance, when trading crude oil futures, these distributions may consider geopolitical events, supply and demand dynamics, currency exchange rates, and weather patterns to estimate the probabilities of various events impacting oil prices.
Similarly, analytics services can create joint probability distributions for agricultural commodities like wheat or soybeans by combining historical weather data, political stability assessments, and trade volume forecasts to predict the likelihood of favorable harvest seasons. This data-driven approach also extends to portfolio diversification and risk management, as these services evaluate correlations between different commodities and model extreme events to guide investors in mitigating risks.
By quantifying the probabilities associated with different scenarios and offering visualization tools, analytics services empower modern decision makers in the commodities market to make more informed choices and navigate this dynamic environment with greater confidence. When seeking consultancy services, choose a company with a good track record and solid experience. Check reviews and obtain expert recommendations to get the most out of this experience.
Precious Metals
While precious metals are commodities, they are different from things like oil, wheat, and natural gas. Just like with oil, wheat, and natural gas, you could invest in precious metals by owning stock in interested companies or relevant ETFs. What makes precious metals different is that it is practical to buy the commodity and invest in it directly.
It is not uncommon for investors to buy gold or silver bullion as an investment. You do have to buy it, store it, protect it, and sell it, but it can be a good hedge against inflation. If you are going to invest in precious metals directly, you will need to find deals on silver and gold. The prices can vary depending on the seller.
Real Estate
Investing in real estate is another way to use a tangible asset as a hedge against inflation. Property values tend to increase with inflation. Along with that, rents also tend to go up as inflation takes effect. With that said, owning a large real estate portfolio is beyond the means of the average investor.
Instead of buying and owning real estate, a Real Estate Investment Trust (REIT) can be a good alternative. An REIT is a company that owns and operates investment properties. With an REIT, investors can benefit from real estate prices through the increase in share prices and by receiving dividends. A good REIT will turn a profit, and the investor doesn’t have to buy, maintain, or manage the properties.
TIPS
Treasury inflation-protected securities (TIPS) are a type of Treasury bond. What makes these bonds special is that they are indexed to inflation. That makes them a reliable hedge against inflation.
Instead of increasing yield with inflation, TIPS adjust the principal value of the bond to compensate. This maintains the value of the bond to protect against inflation. Investors can buy TIPS in five-year, ten-year, and 30-year maturities.
Foreign Currency
Some investors may look to foreign currency as a hedge against inflation. As the value of a currency decreases, it may also lose value in relation to other world currencies. If the investor can buy a currency that is expected to hold its value, it could work as a hedge against inflation to the dollar. With that said, finding currencies to act as a hedge can be difficult.
Similar to precious metals, investors can buy and hold foreign currency. However, there are alternatives to directly investing in currencies. One good option is to buy currency ETFs. Foreign bonds or investments in foreign companies can be other ways to benefit from differences in currency values.
Stocks
The right stocks can also work to hedge against inflation. While the stock market will usually feel the effects of inflation due to factors like rising costs for businesses, there are stocks that can hold or increase in value during times of high inflation.
To start, a reliable stock is a good long-term investment regardless of inflation. Beyond that, some stocks perform well in response to inflation. You just need to look for companies with pricing power. These companies have no problem increasing prices to compensate for inflation. One good example would be the stock of a utility company.
The current economic conditions have investors worried about inflation. It is understandable to have concerns about your investments losing value. With the assets covered in this post, you have a range of investment options that can protect against inflation.