If you do not address inflation in your investment portfolio you will run the risk of your money’s value being depreciated over time. This can be detrimental to your ability to pass along intergenerational wealth to your loved ones while also reducing the quality of life you will have during retirement. Fortunately, there are several types of investments that you can consider mitigating inflation risks.
For hundreds of years societies worldwide have placed value in gold. It is this long and widespread tradition that allows gold to continue to maintain value in contemporary society today. Gold’s proven ability to maintain value over the extremely long run is why many investors feel confident using gold as a hedge against inflation.
Rather than keeping a portfolio with only stocks, many financial professionals suggest designing a portfolio that has a mix of stocks and bonds. Usually, the ideal ratio will be 60 percent stocks and 40 percent bonds depending on your personal financial situation. This is thought to hedge against inflation because certain bonds have interest payments that rise or deflate depending on inflation and deflation rates. This is designed to offer some protection against the payments’ worth.
Another option to consider for inflation hedging is investing in commodities. The reasoning behind this is that commodities tend to appreciate in value before the prices of the products that are made of these commodities increase. In other words, when the purchasing power of your money decreases, in theory, your investments in commodities had already preemptively appreciated in order to make up for your money’s loss in value.
One common method people use to hedge against inflation is to invest in bank stocks. The reasoning behind this is that since banks make money from charging interest on loans, anything that allows interest rates to rise will be beneficial to bank revenues. Therefore, when central banks boost their own benchmark rates in response to inflation, banks will also be able to increase their own rates along with central banks. This means bank stocks will benefit from increased revenue from interest charges which will cause bank stock values to appreciate.
Owning property is one traditional option that people use to mitigate inflationary effects. Real estate has historically appreciated in value as inflation rises. In addition, rental rates also generally rise with inflation which means more revenue for you as an investment property owner.
Real estate investment trusts (REITs)
Although investment real estate can be a great hedge against inflation, many shy away from this option because they do not want to have to deal with being a landlord and managing a property. If you share this view, then you may want to consider investing in real estate investment trusts (REITs). These are companies which own and operate rental properties which produce income for the companies. Through owning stock shares of REITs, you will be able to benefit from owning rental properties without having to manage them yourself.
Design a complete financial plan
Dealing with inflation is important but that is not the only thing you need to worry about when it comes to creating a comprehensive financial plan. Hedging against inflation may not make a difference if you make poor financial decisions that may drastically deplete your assets. Speaking with a professional with an expertise in family financial planning may be a good idea.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Past performance does not guarantee future results. Investments mentioned may not be suitable for all investors.
Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
Be advised that investments in real estate and in REITS have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Additionally, investments in REIT’s will fluctuate with the value of the underlying properties, and the price at redemption may be more or less than the original price paid.