Best Types of Investments to Hedge Against Inflation

Over these past few years, the average person has had to deal with a lot of uncertainty. Compared to how life had been in the few decades before Covid-19, 2019-2022 has seen Europe rocked like a tiny wooden boat amidst ocean waves. Some of these waves, like Brexit, and other large political events, have come from within. Others, unfortunately, have come from the outside. Most literally.

Ironically, all the uncertainty brought upon us by these large political and economical events has made certain that finance-wise we now face very tremulous times. So, here we are – there’s an ever-looming pandemic, an open war and the subsequent economic fallout reigning terror in Europe and other parts of the world, too.

The economic fallout or inflation in particular can already be felt by most around the globe. And, the dust is yet to settle, so to say. During the writing of this blog, annual inflation in the UK is already around the 10% mark. The same goes for the US. Some EU countries are even worse off, with inflation percentages exceeding the mid-teens. And, we’re only halfway through 2022.

While there are some assets that grow in value during high inflation, money certainly isn’t one of them. In fact, one of the most basic definitions of inflation states that inflation is a general increase in prices and fall in the purchasing value of money. And if you want to increase your wealth, losing your gains to inflation simply won’t do.

Of course, a normal inflation rate would be in the neighbourhood of 2%. So, this isn’t your average inflation you have to deal with. Therefore, it is very likely that hedging your money against an inflation rate of 10% or higher will not be as fruitful. Nevertheless, losing some money to inflation is better than losing most money to inflation.

Investment options – there are many!

As it turns out, investing is always a hedge against inflation. It’s just that normally you don’t need most or all of your return on investment simply to cover inflation. Due to this, investments with lower ROI’s, although more secure, do very little to stop you from losing money to inflation.

Luckily, there are plenty of investment options that historically have higher returns. Some of these even perform better during high inflation:

  • Real estate

During inflation, real estate is one of the more profitable assets to invest into. As inflation rates climb, so does real estate value. If property value increases, investors earn more interest – be it higher selling price, higher rent or higher dividends from REITs. Naturally, buying real estate isn’t always feasible, due to the high initial investment necessary. However, the aforementioned REITs let you invest the funds available to you so as not to miss out on the benefits real estate investing can provide. Compared to actually owning real estate, which is a rather illiquid asset, REITs are more liquid and can be bought and sold easily on markets.

  • Commodities

Commodities are another way to hedge against inflation. Often, what causes inflation is the demand-pull ratio, where there is a deficit of a certain commodity (and commodity products)  against the demand of said commodity. Naturally, this commodities price spikes – which is great if you have invested in it. They’re easy to invest in via ETFs that cover a broad spectrum of commodities. However, it’s important to remember that commodities are highly volatile and entirely dependent upon supply and demand. Where they can quickly climb in value, they can also drop as quickly, too.

  • Stocks, bonds, balanced portfolios and broad market indexes

Your investment portfolio remains one of the best tools against the effects of inflation. While an all-equity portfolio is better suited to offset inflation rate, a balanced 60/40 stock/bond portfolio will be a safer choice, albeit less profitable.

Of course, to expose yourself to more earning potential as well as protect yourself from unsystematic market risks, you should diversify your portfolio. As always, that’s best achieved by buying indexes. Like the S&P 500 for equity and US Aggregate Bond ETF for bonds.

The historic returns of the stock market average over 10% annually. However, until earlier this year, three-year 60/40 portfolio returns have averaged 18%. Since the start of 2022 60/40 portfolio returns have been less than ideal, so your investment timing may play a huge role in whether the 60/40 portfolio will actually earn you profits.

If you decide to go for value, try and put emphasis on growth stocks, instead of high dividend-paying stocks. You can do this through an ETF or by purchasing specific stocks that have strong growth potential.

  • Purchase loans 

Similarly to equities and bonds, it’s possible to invest in leveraged loans. They are typically referred to as collateralized loan obligations or CLOs. CLOs consist of multiple loans pooled into a single security, where the investor would receive debt payments from the underlying loans. They’re also considered a good hedge against inflation, and you can invest through loan ETFs.

  • Gold

This really wouldn’t be a list of assets without gold, would it? While gold is also a commodity, it has always stood apart from the rest with its tame volatility and growing appreciation. For a really long time, it has also been considered an alternative to currency, especially in countries where the local currency is losing value.

Unfortunately, gold doesn’t pay any yields, making it less interesting to some investors. But, while there are better assets to invest in, especially to hedge against inflation, gold is still a solid investment that appreciates over time and should you want to diversify your portfolio – definitely go for gold.

What else should you look out for?

Investing your money is just one of the ways to hedge. You can also fight inflation by adjusting your habits. For example, monitor your money flow. This can help you reduce your expenses. That way, you’ll be able to allocate more of your money for investments.

As always, try and invest in yourself. Developing talents and becoming better at what you do can and very likely will pay off someday.

Do remember that volatile assets have the unfortunate tendency to rise and fall in value, making it tough to counter high or even hyperinflation. If you invest in yourself (education, mental and physical health), it might not have an immediate effect against inflation but can surely make your life better in the long run.