How To Hedge Against Inflation?
- Inflation is known to occur from time to time, but by planning ahead, investors can minimise their losses.
- Consider diversifying your portfolio by investing in certain asset classes that tend to outperform the market during inflationary pressures.
- Commodities, real estate, defensive stocks, cryptocurrency, and TIPS can provide some level of protection against inflation.
7 Ways to Hedge Against Inflation
It is a difficult and uncertain time to be an investor, as inflationary pressures appear to be on the rise globally. A survey showed that 64% of leading economists believe we are headed towards a global recession in 2023. This has caused many investors to lose sleep at night, wondering how they can protect their portfolios against the threat of inflation. Let's look at some steps you can take now to hedge against rising prices.
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1. Don’t overlook commodities
While stocks and bonds tend to get most of the attention when it comes to investing, many investors tend to overlook commodities. Commodities like metals, oil, and raw materials, can offer some protection since their prices often rise along with inflation.
For example, gold is a popular choice amongst investors for hedging against inflation and economic turmoil as its prices usually rise when there is uncertainty in the market. This is evident even in 2022, when gold prices were up by 0.6% in the year's first half.
2. Look at real estate investments
Real estate can also be a great tool to hedge against inflation, as it is a physical asset that tends to increase in value over time. In addition, real estate provides the added benefit of generating rental income, which can help to offset any losses in your portfolio due to inflation.
As an alternative, you could also invest in REITs (Real Estate Investment Trusts), which are companies that own and operate income-producing real estate. This offers you the benefits of investing in real estate without the hassle of having to manage the property.
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3. Invest in TIPS
TIPS (Treasure Inflation-Protected Securities) are another way to protect yourself against inflation. These are debt instruments issued by the US government that protect against inflation by offering a variable interest rate that is adjusted for inflation.
When you buy a TIPS bond, you essentially agree to receive a fixed rate of interest payments plus an adjustment for inflation. This means that if the inflation rate rises, your interest payments will increase as well. This provides some degree of security against the eroding purchasing power of your investments due to inflation.
4. Consider Bitcoin
While it is often thought of as a speculative investment, Bitcoin can be a reasonable hedge against inflation. Bitcoin is not subject to the same inflationary pressures as fiat currencies, which are more vulnerable to government policies.
In addition, the supply of Bitcoin is limited to 21 million coins, and there will never be more than that. This makes Bitcoin a scarce asset, similar to gold, which tends to do well in times of inflation.
However, understand that cryptocurrencies are notoriously volatile. Enter the scene only when you are ready to deal with potentially high losses. By being prepared and familiarizing yourself through deep research, you can smartly navigate your way around these risks.
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5. Invest in defensive stocks
Expanding your stock portfolio into defensive stocks is another way to protect your investments against inflation. Defensive stocks are those that typically perform well during periods of economic uncertainty and market volatility.
They include companies in the healthcare, utilities, and consumer staples sectors that provide essential products and services people continue to seek even in tough times.
Investing in defensive stocks can help insulate your portfolio from inflation's negative effects. They may not provide the same upside potential as more cyclical stocks during periods of economic growth, but they will help to preserve your capital during tough times.
6. Open a High-Yield Savings Account
Moving your money to a high-yield savings account will help ensure to some extent that your money keeps up with inflation. This is because these accounts typically offer higher interest rates than traditional savings accounts, which can help grow your savings and offset high costs of living.
For instance, if you have €10,000 in a traditional savings account that offers 0.5% interest, your balance will only grow by €50 after one year. However, if you have the same amount in a high-yield savings account that offers 2% interest, your balance will grow by €200 after one year.
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7. Diversify your portfolio
If there is anything to be gained from the previous tips, it’s that you should not put all your eggs in one basket. Different asset classes will be affected in different ways when it comes to inflation, also based on the type of inflation the market is in.
In general, an investor should work towards diversifying their portfolio across different assets so they are not too exposed to any particular risk. It is perhaps the best way to hedge against inflation, as it will help you weather the ups and downs of the market and protect your portfolio.
Final thoughts on hedging against inflation
When it comes to hedging against inflation or building your investment portfolio in general, there is no fixed strategy that will work for everyone. Having said that, diversifying your portfolio is one of the most common ways to weather the storm.
Understand that none of these tips are foolproof, but you may sleep better knowing you have taken steps to protect your portfolio from the ravages of inflation.
This blog is for educational purposes only. The information we offer does not constitute investment advice. Please always do your own research before investing.
Any views expressed in this blog and by BOTS do not constitute a recommendation that any particular cryptocurrency (or cryptocurrency token/asset/index), portfolio of cryptocurrencies, transaction, or investment strategy is suitable for any specific person.