Hedging Against Inflation? Here's What To Do

Hedging Against Inflation, Here's What To Do

As governments attempt to boost their economies with different forms of support or quantitative easing, inflation continues to hit record-highs, with the US witnessing the highest inflation ever in 30 years. On the extreme end of the spectrum, Lebanon has experienced a whopping 144% inflation rate in 2021.

This means savers are becoming losers!

If you keep your money idle in the banks (or stashed at home), its purchasing power is being lost over time. A dollar today will not buy the same value of goods in ten years. This is due to inflation. Inflation measures the average price level of a basket of goods and services in an economy; it refers to the increases in prices over a specified period of time. As a result of inflation, a specific amount of currency will be able to buy less than before. Therefore, if you're worried about inflation, you should find the right strategies and investments to hedge against inflation.

A disciplined investor can plan for inflation by investing in asset classes that outperform the market during inflationary climates. Here are some of the top ways to hedge against inflation.

Precious Metals

Gold and silver have often been considered hedges against inflation. In fact, many people have looked to precious metals as "alternative currencies," particularly in countries where the native currency is losing value. Gold and silver are real, physical assets, and tend to hold their value for the most part.
However, both gold and silver are not a true perfect hedge against inflation. When inflation rises, central banks tend to increase interest rates as part of monetary policy. Holding onto an asset like precious metals that pay no yields is not as valuable as holding onto an asset that does, particularly when rates are higher, meaning yields are higher.

CommoditiesCommodities are a broad category that includes grain, precious metals, electricity, oil, beef, orange juice, and natural gas, as well as foreign currencies, emissions, and certain other financial instruments.
Commodities and inflation have a unique relationship, where commodities are an indicator of inflation to come. As the price of a commodity rises, so does the price of the products that the commodity is used to produce.

Before investing in commodities, investors should be aware that they are highly volatile and investor caution is advised in commodity trading. Because commodities are dependent on demand and supply factors, a slight change in supply due to geopolitical tensions or conflicts can adversely affect the prices of commodities.

Income Producing Real EstateReal estate works well with inflation. This is because, as inflation rises, so do property values, and so does the amount a landlord can charge for rent or lease. This results in the landlord earning a higher rental income over time. This helps to keep pace with the rise in inflation. For this reason, income-producing real estate is one of the best ways to hedge an investment portfolio against inflation. Property prices and rental income tend to rise when inflation rises.

Like any investment, there are pros and cons to investing in real estate. First, when purchasing real estate, the transaction costs are considerably higher (as compared to purchasing shares of stock). Second, real estate investments are illiquid, meaning they can’t be quickly and easily sold without a substantial loss in value. If you are purchasing a property, it requires management and maintenance, and these costs can add up quickly. And finally, real estate investing involves taking on a great deal of financial and legal liability. For those investors who want to overcome the cons of investing in real estate and also be passive investors without the hassle of property management, they can choose to invest in Real Estate Investment Trusts (REITs) or Real Estate Crowdfunding (REC).

Related: Step-By-Step Guide to Real Estate Investing

REITs are companies that own and operate income-producing real estate. A REIT consists of a pool of real estate that pays out dividends to its investors. On the other hand, investors can enjoy fractional ownership of a property that's managed by a real estate crowdfunding company. In that way, investors earn their share of the income from the rent, lease, or capital gain to the extent of their ownership of the property. If you seek broad exposure to real estate to go along with a low expense ratio, consider CasaBayt.

Stock and BondsInvesting in stocks and bonds is considered to be a safe, if you select a conservative portfolio. Selecting the stocks and bonds to include in your portfolio requires proper analysis of each; otherwise, paying an investment advisor to assemble such a portfolio could help.
Investing in a conservative portfolio of stocks and bonds could be seen a straightforward, easy investment strategy. But like all investment plans, it does have some disadvantages. Compared to an all-equity portfolio, a conservative portfolio will underperform over the long term. It's important to keep in mind that a conservative portfolio will help you hedge against inflation (and keep you safer), but you'll likely be missing out on returns compared to a portfolio with a higher percentage of stocks.
Related: Which Assets Build Wealth – Stocks, Bonds, or Real Estate?

What about Cryptocurrencies?

It seems like almost everyone in our circles of friends and colleagues is into bitcoins, even though they don't understand what they're getting themselves into nor the high risk of investing in digital currencies. When they read how other investors were able to make thousands of dollars in a few days, during 2017, with the help of cryptocurrencies, they jumped on the wagon when the ride going up is smooth. Only time will tell whether the ride is still going up or if Bitcoin investors need to brace themselves for a downward ride at a speed that might make it derail and throw everyone out!

Related: Brace Yourself For The Bitcoin Roller Coaster Ride