Inflation refers to the sustained increase in the price of goods and services. Over time, inflation decreases the value of the country’s currency. Of course, even in inflationary times, investors continue to invest. It’s what they do.
And many investments have been used as hedges or protections against the negative effects of inflation. Here are those investments.
Real Estate
Real estate is a widely favored choice among investors. For one, rising prices also increase the resale value of the property over time.
What’s more, real estate can also be used to generate rental income. Similar to the way the value of the property increases along with inflation, the amount that tenants pay for rent increases over time.
The increases in payment enables the owner to generate income using an investment property. It also helps them keep pace with the general price increases across the country.
You can make real estate investments through direct ownership of property and indirect investment in securities, such as a real estate investment trust (REIT).
Commodities
When inflation brings about problems to a currency, investors also sometimes turn to more tangible assets.
Investors tend to invest more heavily in gold during inflationary times, pushing its price higher in the financial markets.
The precious metal can also be bought directly or indirectly. You can buy a bullion and store if you think that’s better, or you can invest in company stocks that have ties to gold mining businesses.
Commodities include things like oil, cotton, soybeans, and even orange juice. Similar to gold, the price of oil moves along with inflation.
This price increase spills over the price of gasoline and then to the price of every consumer good transported or produced.
Bonds
Investing in bond may be the last thing you want to do during inflationary times. That’s because high inflation ruins any fixed income instrument as interest rates also rise.
On the other hand, to fix this problem, investors have the choice to buy inflation-indexed bonds. For instance, in the United States, Treasury Inflation Protected Securities (TIPS) are a popular option.
You can access inflation-indexed bonds in many different ways. For example, you can directly invest in TIPS through the US Treasury or via a brokerage account. You can also find them in some mutual funds or exchange-traded funds.
Stocks
Meanwhile, company stocks typically have better chances of keeping up with inflation. However, keep in mind that not all equities can do this since not all equities are created equal.
For one, dividend-paying stocks usually suffer similar to fixed-rate bonds, during inflationary times. You should then focus on companies that can pass the rising product costs to consumers. You can find these companies usually in the consumer staples sector.
Loans and Debts
You can also use leveraged loans as potential inflation hedges. These are floating-rate instrument. That means banks or other lenders can raise the interest rate. And as a result, the return on investment (ROI) keeps pace with inflation.
Also, mortgage-backed securities and collateralized debt obligations are also good choices. Simply put, you are not directly investing in debts, but you are investing in securities with underlying assets being loans.
