How To Hedge Against Inflation For Beginners

How To Hedge Against Inflation For Beginners

By Yash

You may have seen that the hotel you may want to book for any upcoming vacations was costlier than twelve months ago. You may have even seen that your grocery bills have gone up even though you are getting the same food. If that is so, you are looking at the latest raging inflation in the nation. Over the past few months, the increase in the cost of services and goods has been attributed mostly to the world opening back up after the coronavirus pandemic. But we still do not know precisely how long it will continue or what the financial implications are. For the usual consumer, the growth in the costs may mean that you will have to restrict any unusual spending so as not to get a big hit on your savings. This article will give you some pointers to help you hedge against inflation.

 

Ivory Johnson, CFP and founder of Delancey Wealth Management, said, "I tell my clients that gas isn't getting better. Your money is just getting worse."

 

1. TIPS

 

These are Treasury Inflation-Protected Securities. The term may seem a little complicated, but it is easy to learn. These are bonds issued by the government that mirror the decrease and increase of inflation. When inflation increases, the interest rate also increases. And the same happens when they decrease. These bonds have the backing of the federal government of the nation. So, they are one of the most secure investments that your money can get. It is also a great way to diversify your investments and supplement future retirement income. The cost of the bond moves in sync with the Consumer Price Index. Thus, it assists in safeguarding against any great fluctuations in the nation's inflation rate. These bonds give interest a couple of times a year at a predetermined rate. They are issued for maturity periods with varying lengths. At maturity, the investors are paid the original principal or the adjusted principal, whichever is more. It is a great way to hedge against inflation.

 

Diahann Lassus, a CFP and managing principal of Peapack Private Wealth Management, said, "Adding TIPS can help balance out your fixed income or bond portfolio since they're indexed to inflation." Amy Arnott, a portfolio strategist at Morningstar, said, "TIPS are by far the best inflation hedge for the average investor."

 

2. Cash

 

According to many financial experts, this is a portion that is not often considered a hedge against inflation. The pandemic showed how random the overall national and global economy could be. Experts suggest that you always store cash in a certificate of deposit, money market account, or high-yield savings account. You should set aside half a year of cash for households with multiple sources and income and a few months more if the household has a single source. You should seek to maintain your short-term certificates of deposit until you can find out the long-term scenario regarding the rate of inflation in the nation. Anna N'Jie-Konte, a CFP and founder of Dare to Dream Financial Planning, said, "Having too much cash is an underestimated risk for individuals' finances." Arnott said, "While cash isn't a growth asset, it will usually keep up with inflation in nominal terms if inflation is accompanied by rising short-term interest rates."

 

3. Short-Term Bonds

 

Seeking to keep your money in these instruments is a strategy similar to maintaining cash reserves in a savings account or a certificate of deposit. The money is accessible and safeguarded. The growing inflation may lead to higher rates of inflation. Then these instruments turn out to be a great hedge against inflation. This is because there will be losses in long-term bonds. For these various reasons, it is good to stick with these instruments and not go for any investment focused on the long-term. It will help you to hedge against inflation. Lassus said, "Make sure your bonds or bond funds are shorter-term since they will be affected less if interest rates begin to rise quickly." Arnott said, "Investors can also reinvest short-term bonds at higher interest rates as bonds mature."

 

4. Stocks

 

If a person is new to investing, they should not worry. It is much easier in the times of the internet to get going with investing. If you want to do so, you will have to open an account with a trading or brokerage platform. There are several trading platforms that give trading at no commissions. These brokerages also have the broadest range of choices for investment. They have great educational resources, top customer support, user-friendly tech, and lots of choices for investments. When you invest, keep in mind that the present issues of inflation may only be temporary in nature. So, they should not look to make any major modifications in the portfolio that may lead to decreased performance when the inflation declines.

 

Lassus said, "Diversification works whether we have rising or stable inflation. Don't make dramatic changes based on current inflation or market conditions since most of us are still long-term investors," Arnott said, "Stocks can be good as a long-term inflation hedge but can suffer in the short term if inflation spikes. Bitcoin is often described as 'digital gold' and theoretically should protect against inflation because of limited supply. But the jury is still out on whether it will be a good inflation hedge over the long term."

 

5. Real estate

 

Real estate usually performs well when inflation is on the higher side. This is because the price of the property also sees growth. This means that the landlord can charge more for the rent of the property. This, in turn, leads to a growth in income and keeps pace with the increase in inflation. But beyond the ownership of homes, the investments in real estate can also be made through Real Estate Investment Trusts. It can also be made using mutual funds that invest in these trusts. But the period after the pandemic may modify how the real estate sector responds to the growth in inflation. The demand for commercial real estate is still unsure. This includes retail and office spaces. This is because more firms are talking about hybrid models or remote working. Still, the asset is a safe hedge against inflation. Arnott said, "Fundamentals are somewhat in question because of the long-term effects of Covid."

 

6. Gold

 

Gold is an instrument that does not always safeguard against increasing inflation in the short term. The value of gold goes up over the long term, usually in decades. The asset has typically been a safe bet for investors when inflation goes up, or the interest rates are kept low. The asset looks to fare well when the real interest rates go negative. The real interest rate is the reported rate of interest subtracted by the inflation rate. Investors often see gold as a store of value when the times are tough in the economy. This is why it has seen great success over longer time frames. A great choice for investing in this asset is to purchase it using an exchange-traded fund. In this manner, one will not have to take ownership and guard the gold themselves. Also, there are many choices with such exchange-traded funds. It permits one to own their own physical gold or the shares of old miners. This can give a bigger upside if the prices of gold increase.

 

7. Commodities

 

The cost of raw materials typically grows along with inflation. So, they can provide a great hedge against it. But the investors should keep in mind that these commodities can also prove to be very risky. The costs for commodities hinge mainly on supply and demand. This can be very unpredictable and makes it a risky investment. This is also boosted by the fact that investors take on leverage. It usually leads to a higher probability of winning, but losses also go up.

 

Conclusion

It is very important for every individual to get a hedge against inflation. This is because the present inflation rate is very high because of the coronavirus pandemic. It remains to be seen whether this level of inflation will continue or the hikes in the interest rates by the Federal Reserve will change things. Still, it is always safe to hedge against inflation.