Investors worry about inflation, How to & what are the ways to Hedge a Portfolio Against Inflation because it eats away at the purchasing power of their money and makes their investments have to work harder to produce returns beyond inflation.
Hedge a Portfolio Against Inflation
real returns for most of the 20 teens inflation averaged less than 2 percent but inflation only rose 1.4 year-over-year in 2020 in large part due to the pandemic in april 2021 that rate jumped to about 4.2 percent mainly due to the multiple rounds of stimulus and a rapidly reopening economy that may not sound high especially when you look at the high inflation periods, like the 70s when inflation averaged more than seven percent but too much inflation too quickly called hyperinflation can lead to economic instability and market crashes while many economists and policy makers don't think a return to the hyperinflation of the 1970s is likely they see this more as a temporary bump inflation may still pose slightly higher risks into the 2020s when it comes to protecting your portfolio.
It can be helpful to see which types of investments have historically weathered high inflation environments better than others.
Remember past performance is not a guarantee of future performance.
Look at these charts.
They compare the returns of bonds stocks and real estate investment trusts also known as reits on the left.
You see the overall historical returns from 1972 to 2020. On the right.
You see returns during a period of, particularly high inflation 1974 to 1980.
Over the long term each investment outperformed inflation, but bonds weren't able to keep up during periods of high inflation stocks and reits on the other hand have historically held up better, but that doesn't necessarily mean investors should leave bonds out of their portfolios bonds haven't outperformed high inflation because they typically offer lower returns, but they have historically grown even when the stock market contracts just look at the great recession investors anticipating higher inflation might consider optimizing their bond holdings, for example shorter term rather than longer term treasuries can allow you to roll into higher yielding treasuries.
If interest rates rise in response to higher inflation, but remember bonds typically decline in price when interest rates rise and vice versa investing in treasury inflation-protected securities also called tips is another possibility tips are a special type of treasury indexed to the consumer price index or cpi the interest rate earned with a tips investment holds steady over its life, but the par value of the treasury rises with inflation, but if interest rates rise in a low or no inflation environment the tips price could decline when tips mature the investor is paid the original or adjusted principal whichever is greater.
Like we said stocks have outpaced inflation over the long run but that comes with risk, which some investors may not want to take on one potentially less volatile strategy investors could consider is value stock investing which is when an investor chooses stocks that may be underpriced value companies are less likely than growth companies to borrow to produce future earnings, which could lessen the impact of rising interest rates in response to inflation dividend-paying stocks and reits are alternatives as well investors who lean toward real estate should consider a reits holdings an mit study from 2017 found that retail property income tends to provide the best hedge against inflation when compared to industrial residential and office property, but keep in mind that investments in reits and other real estate securities are subject to the same risks as direct investment in real estate including loss of principal some investors turn to gold another precious metals which have been considered a hedge against inflation for a long time too.
A big reason some investors turn to metals is their real tangible assets in theory all the gold that has ever existed still exists. That's a way to Hedge a Portfolio Against Inflation.
There are several ways to invest in gold and other precious metals like etfs that track the price of gold investing in mining companies or even buying physical bars.
You could consider other commodities like coffee or oil inflation is typically tied to increased demand for goods and services, which is often good news for commodities to get exposure some investors might consider related stocks or etfs that track certain commodities but commodities are not for everyone.
They can be extremely volatile and are often tied to world events competition government regulations and economic conditions.
Some investors are turning to the new kid on the block cryptocurrency bitcoin evangelists, like elon musk believe that crypto is less susceptible to the effects of inflation because it has a certain number of coins that can be circulated.
It can't be watered down to Hedge a Portfolio Against Inflation.
The thing is they're still very new and very volatile investments which makes it hard to draw conclusions bitcoin hit all-time highs in april 2021, but it also saw major drops that month and in may 2021 while inflation expectations ballooned.
So the jury is still out on whether cryptocurrency could act as a hedge against inflation over the long term bitcoin and other cryptocurrencies are very speculative investments.
They involve a lot of risks and may not be suitable for everyone each inflationary period is different in the early 20th century.
Most high inflation periods were tied to wars.
Mainly the two world wars the great inflation a period from the 60s to the start of the 80s saw high inflation that led to the rethinking of central banking regardless of how much you think inflation will rise to vary your holdings may offer some protection you'll need to do your own research to determine which kind of assets might offer the best hedge for your portfolio you.
So this was our top recommendations or you can say ways to Hedge a Portfolio Against Inflation.