Inflation is a risk every investor faces, and it can make portfolios challenging to manage. But there are a few investments that protect and hedge against inflation, helping investors stay on track towards their financial goals.
One way to hedge against inflation is by investing in Treasury Inflation-Protected Securities (TIPS). These bonds adjust their values up and down as inflation rises or falls.
When inflation hits a high, investors may want to protect and hedge against its effects. Treasury Inflation-Protected Securities (TIPS) are an effective way to do that.
These government-backed debt securities are issued at various times throughout the year and can be purchased in 5-year, 10-year and 30-year maturity terms. TIPS have low credit risk and are exempt from state and local taxes.
They are indexed to the Consumer Price Index (CPI). When inflation rises, the bond's principal value is adjusted upward. When inflation drops, the par value of the bond is adjusted downward.
Inflation-adjusted TIPS never pay back less than the original principal amount, ensuring that you always receive more than the original face value of your investment. However, deflation can reduce the par value of a TIPS and decrease your return, so it's essential to check on the inflation index ratios associated with your investment before purchasing or selling.
Inflation-protected TIPS offer an effective hedge against inflation and are an attractive investment for long-term investors. They also have several other benefits, including a low credit risk and a deflation-protection feature that ensures you never receive less than the original face value of your investment upon maturity.
REITs are publicly traded companies that own, manage or lease real estate and pay out a quarterly dividend to their shareholders. They can be an excellent way to diversify your portfolio and generate income, particularly in periods of high inflation.
REITs typically offer dividend yields higher than global equities and grow their dividend faster than inflation on average. They also tend to offer more stable returns than broad equities, which are often subject to volatility and can be more susceptible to rising interest rates.
Many REITs specialize in a specific property type, such as apartment buildings, retail centres (outlet malls), offices, warehouses, hotels, data centres, and medical facilities. However, others are broadly diversified across all types of income-producing real estate.
REITs can hedge against inflation greatly because rents and property values increase when prices rise. This is especially true when a REIT invests in assets like hotels, where the rental or lease payments can grow to reflect rising prices.
During periods of high inflation, commodities have shown strong performance, but it's essential to understand that investing in these types of investments comes with risks. Investors can use mutual funds, ETFs, or futures contracts to gain exposure to a specific commodity index.
Commodities are raw materials, usually used to produce goods and services, traded in various markets worldwide. They include food and energy, as well as precious metals and minerals.
They tend to correlate less to traditional asset classes like stocks and bonds. This means that if a stock's price decreases, a commodity's price will rise, making them a popular investment option for diversification purposes.
Despite their growth potential, commodities are often volatile. They are subject to world events, exchange rates, import controls, worldwide competition, and government regulations that could impact the price of a particular commodity. Because of these risks, some experts recommend that investors only allocate 5-10% of their portfolios to a commodities allocation.
Equity investments are shares of stock in a company that investors purchase on the stock market. Investors buy these shares with the expectation that they will increase in value through capital gains and dividends.
Investing in equities is essential for protecting and hedging against inflation because stocks typically offer higher cash flows than other investment products. They also tend to grow in value over time, so holding a diversified portfolio of these securities can help investors maintain purchasing power even as the economy's overall growth slows.
Inflation is a hot topic for many investors because central banks have aggressively implemented policies pushing inflation higher. However, it's essential to remember that investing in inflation-linked bonds, which pay a fixed yield until a specific inflation target is met, is not the best way to hedge against rising prices.
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