how to hedge against inflation

There are hundreds of REIT equities, ETFs, and Mutual Funds in the YCharts database, in addition to general real estate sector securities such as the SPDR Select Real Estate Sector ETF (XLRE). Other tangible assets include commodities, such as oil, lumber, and steel, whose prices not only increase with inflation but also act as indicators of both future inflation and economic growth. As the economy expands, the demand for commodities heats up, pushing their prices higher. During the financial crisis of 2008, the price of foreign currency funds dropped 17 per cent. Hedging against inflation with foreign currency funds is valuable, but it isn't the best way to protect your asset value.

80% of the assets we assess as part of our Long-Term Capital Market Assumptions have a higher expected return than inflation. The easiest way to defend purchasing power is to invest excess cash in a portfolio that fits your goals and time horizon. If the Federal Reserve reacts to higher inflation by raising rates, it could make borrowing costs less attractive. In the industrial sector, the continued shift toward e-commerce will necessitate more warehouses, storage and logistics globally. Problems in the global supply chain that became glaringly evident in 2021 highlight the need for more investment.

how to hedge against inflation

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Hedging your portfolio against inflation

Paying more for your home, over the long run, could end up hurting your finances more than helping them. You would need to do the calculations on the extra rent you’re paying due to inflation against the extra money you would end up spending on your new property. Inflation is the rise of prices for things purchased within an economy that leads to a decline in purchasing power over time. Inflation is inherently considered a bad thing because it means that a unit of currency effectively buys less than it used to. This can put a strain on individuals and families as they strive to keep up with the same amount of things to buy but effectively with less money to spend. When it comes to hedging against inflation or building your investment portfolio in general, there is no fixed strategy that will work for everyone.

We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Inflation reduces the purchasing power of your money, so you can’t buy as many things with the same amount of money. If your salary remains the same and there is inflation, you may not be able to buy everything you need without having to borrow money for the difference. If you can still afford all the things you need, you won’t have as much money on hand to invest or spend on leisure activities or other things you may want to purchase.

how to hedge against inflation

In this blog post, we will discuss how to hedge against inflation and protect your portfolio from its effects. In 2021, we experienced an inflation rate of 7% – and halfway through 2022, the rate of inflation is at 8.6%. Thus, your gains need to exceed 10% annually – just to see any profit from your investments. In this article, BDO Wealth Advisors’ investment committee provides an introduction to the PE secondaries market and discusses potential risks to keep in mind.

Journal of Financial Economics

Commodities are assets such as natural resources, raw materials, agricultural products. Prices of commodities usually increase when inflation is high, as is occurring today with lumber and copper prices. Gold and silver throughout history have been viewed as having intrinsic worth, unlike most fiat currencies. To help you determine if it’s the right time to invest in real estate, consider working with a financial advisor.

  • By being prepared and familiarizing yourself through deep research, you can smartly navigate your way around these risks.
  • We sell different types of products and services to both investment professionals and individual investors.
  • There are free online calculators that you can try or consult with a personal finance specialist.
  • As a result, they are less likely to lose value when interest rates rise.
  • You can check out our picks for the best high-yield savings accounts to find an account.

In addition, REITs offer the potential for high returns and are a relatively low-risk investment. For these reasons, many financial experts recommend investing in REITs as a way to hedge against inflation. Leveraged loans are typically made to companies with high levels of debt. Because they are considered to be higher-risk investments, they offer higher interest rates than other types of loans. Even when entering into certain positions in order to hedge against inflation, make sure you are maintaining a good level of diversification that aligns with your overall investment strategy. Inflation hedges are generally short-term strategies, but keep your long-term objectives in mind to prevent unwanted exposure in your portfolio.

Purchase Gold and Precious Metals

Beyond home ownership, real estate investments can be made through REITs (also known as Real Estate Investment Trusts) or through mutual funds that invest in REITs. TIPS bonds pay interest twice a year at a fixed rate, and they are issued in 5-, 10- and 30-year maturities. At maturity, investors are paid the adjusted principal or original principal, whichever is greater. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.

But as inflation hit the rest of the world in 2022, the US Dollar strengthened once again. When speaking of foreign currency, there are many different ways for investors to hedge their risks. Inflation hedging is a way for investors to protect against the potential loss of value in foreign currency. Although the price of gold rose by more than 2,400 per cent between 1980 and 1985, the price of foreign currency funds has fluctuated over the last few years. This creates a situation where the currency seller can't turn around and sell the foreign currency at a higher price. By hedging against the loss of currency value, forward contracts are an excellent option for investors worried about currency risk.


For these reasons, it is generally advisable to avoid keeping large sums of money in a savings account. Instead, invest in other physical assets such as real estate, which have the potential to appreciate in value over time. With inflation currently running at around 2%, investing in a 60/40 stock/bond portfolio is an effective way to protect your assets and grow your wealth over the long term. In addition, many companies also pay dividends, which can provide a source of income that keeps pace with inflation. As a result, investing in stocks is one of the best ways to protect yourself from the effects of inflation.

Inflation hedging is one of the many strategies investors need to take into account as the value of the dollar drops. And fortunately, there are a number of ways you can protect your assets as rising inflation grips the nation. And once you know what you’re up against, you can take steps to hedge your capital against inflation. While stocks, bonds, and cash lose their purchasing power as inflation rises, investing in self-storage real estate may be the perfect inflation hedge. Inflation is defined as a sustained increase in the prices of goods and services.

Journal of Political Economy

Powering the insights and conversations that drive financial goals and dreams. Building a great tech company requires risk, but doesn't require currency risk. At the point in time when the forward contract expires, the buyer and seller of the forward contract engage in a currency trade or, more commonly, the buyer can request delivery of the currency. By keeping up with inflation, you can maintain the value of your money. For example, $1 in 1990 is equivalent to more than $2 today, so a $1,000 mortgage payment 30 years ago would be worth more than $2,000 now. Effectively, you're paying half as much each month to service the debt.

how to hedge against inflation

Another measure that investors can take to hedge against inflation is to create a diversified portfolio of stocks from around the world. To avoid inconsistencies in the value of their investments, investors go for stable investments that maintain or grow in value during periods of inflation. For example, real estate is considered a good inflation hedge because the rental income and the market value of real estate properties tend to maintain or increase during inflationary periods. Gold and precious metals have been coveted by civilizations and individuals for thousands of years.

How to Hedge Against Inflation

Monetary debasement occurs when governments print more money, as is occurring today in many countries around the world, including the United States. The Federal Reserve's balance sheet has more than doubled in size in the past two years alone, growing from about $3.9 trillion dollars in May of 2019 to $7.9 trillion in May of 2021. Monetary debasement and inflation are synonymous with one another because there is more money to spend on scarce assets such as real estate the more prices rise over time. Unlike stocks, bonds, paper gold and silver, and electronic cryptos, real estate is an asset that generates recurring income streams and an increase in asset value over a long-term holding period. For these reasons, real estate is often referred to as a "hard asset." Another reason that real estate isn’t always the perfect hedge is that the Fed typically responds to rising inflation by increasing interest rates.