We've all heard of an inflation hedge, but what is it, really? It's an investment that can protect a currency's purchasing power when it loses value because of inflation or rising prices elsewhere. Generally, it means you're investing in assets that should increase or maintain value over a specified period.
However, the hedge might require you to take higher positions in your assets, which could decrease value rapidly compared to the currency value.
Usually, inflation hedging offsets an anticipated drop in the price of a currency.
As I’ll touch on later in this article, precious metals IRAS have been a move many Americans have made with the recent bank collapses and turbulent stock market. Here are three recommended companies offering free investing guides and consultations. Investors who were smart enough to have this structure in place prior to the 2008 economic collapse doubled, and in some cases, tripled their investment while many other people had to kick back their retirement plans several years.
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Best Inflation Hedge: Precious Metals IRA
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How It Works
High inflation can make your investment value drop. Some investments will still see a good return, but rising inflation means they're sold at a loss.
If we invest in stocks that offer a five percent return and inflation is sitting at six percent, we lose a total of one percent. You need an asset class that's considered a self-fulfilling inflation hedge. Most investors choose them, so their values are higher when the intrinsic value is lower.
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Let's say the dollar loses value because of inflation. That means gold prices are higher. If you already own gold, you're protected against the dollar bill going under. This ensures that your investment objectives might shift but are still good enough to save you.
Real-world Examples of Inflation Hedging
Companies might use inflation hedging to keep operating costs lower. The most famous example is when Delta Airlines purchased the ConocoPhillips oil refinery in 2012 to reduce the price to produce jet fuel.
Delta wanted to offset inflation by producing its own jet fuel at lower costs than it would take to purchase on the market.
Inflation Hedging Limitations
Overall, inflation hedging could be volatile, and there are limits. In the case of Delta Airlines, it didn't consistently make money on its refinery, so you could say it wasn't effective.
Generally, we know there are arguments on both fronts, and these alternative investments are often seen as volatile and "unsure." You have countless variables out there, such as:
- Global infrastructure spending
- Production outages and spikes
- Chinese economic growth
- Global population growth
- Emerging political turmoil
- Technological innovation
Such changing factors will determine if sustained inflation is here to stay and whether inflation hedging might be right for you.
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Best Ways to Hedge Against Inflation
If you want to boost your purchasing power while lowering your risk, here are the best inflation hedges available:
Have an Internationally Diversified Portfolio for Inflation Rises
American investors prefer US stocks and bonds, but that can be expensive in the long run, especially when inflation happens. International exposure is often a wise course of action to hedge against inflation.
Some major economies don't rise and fall as US indices do. These include South Korea, Australia, and Italy. When you add stocks from these countries, you'll protect yourself against economic cycles. Usually, foreign issuers give you more exposure to a fixed income that won't drop in price when inflation occurs in your home country.
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A mutual fund or exchange-traded fund are also excellent ways to diversify your portfolio and get into the international market. They're low-cost compared to foreign stocks and ADRs (American Depositary Receipts).
Use the Stock Market to Offset Rising Prices
When inflation rears its ugly head, it will likely hurt the bond market, though it could fare well for the stock market. A wise hedge against inflation is to reallocate about 10 percent of your portfolio into equities from bonds to benefit from this trend.
Experts often tell us that a 60/40 split is best, so you have 60 percent of stocks and 40 percent of bonds. This is conservative and a great mixture. However, you can also buy preferred stocks because they're liquid and often pay higher yields than bonds without declining in price when inflation happens.
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Utility stocks are another alternative. Usually, the price rises and falls predictably throughout the economic cycle and will pay steadier dividends.
Bank Loans
Businesses typically thrive during periods of inflation because prices go up. For example, banks often earn money because interest rates rise, and they can profit from the increased loan amounts.
If you can, it might be wise to purchase senior secured bank loans to earn high yields. This gives you inflation protection when prices drop, and rates soar. However, there's often a large time lag. The value of the loan won't increase as quickly as the rates. One example is the LFRAX (Lord Abbett Floating Rate Fund).
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Usually, these investments are confusing, so new investors might want to use a mutual fund or ETF first. You can often get exposure to bank loans, treasury bonds, and all the rest through brokerage services. Still, these companies take a commission, so you should factor that in when making a decision.
Consider Treasury Inflation-protected Securities (TIPS)
TIPS (Treasury inflation-protected securities) are US Treasury bonds that will increase in value while keeping pace with inflation. The US federal government backs them up, so they're the safest investments.
These bonds are primarily linked to the Consumer Price Index, and the principal amount gets reset according to whatever changes occur. You'll receive interest two times per year, and interest rates are fixed. They get applied to your adjusted principal, which rises when inflation happens and falls during deflation periods.
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Though it could be a great choice for some, there are risks involved. In fact, TIPS are sensitive to all changes with interest rates, so selling an investment before it matures will cause you to lose money.
Choose Real Estate with High-Interest Rates
If you want to hedge inflation, real estate investing could be a great choice. This asset class offers a fixed income because of the dividends. As costs rise, you may consider rental income to be easier for you. Likewise, if you purchase a house, you can take advantage of the fixed interest rate.
Real estate is tangible, but it's also illiquid. Therefore, you may want to try REITs (Real Estate Investment Trusts) because they're more liquid and can easily be sold or bought. The companies own and operate residential, commercial, and industrial property portfolios. Then, they give you income through leases and rents, which pay a higher yield.
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Typically, operating costs stay the same, even when rates rise. Therefore, it's like you get a fixed rate without having to worry about using various financial assets.
The Best Hedge Against Inflation Historically - Gold
Are you wondering what the top hedge against inflation would be historically? That depends on the time frame. Usually, commodities are a good bet when you're trying to focus on the cost of living, and gold is one of them. However, experts do say that gold only works over the long term, such as 100 years or longer.
Economists and analysts believe equities could be a good inflation hedge if you're thinking long-term because they will protect you from flare-ups in the inflation rate. For this reason, the gold IRA rollover , where you allocate a percentage of your IRA, 401k, pension, or other retirement account, into a gold (or silver) backed IRA.
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This is a savvy move that has been widely covered on websites such as IRAInvesting.com , where the founder provides a first hand account of how this process is done.
Still, most people turn to gold because it keeps its value when everything else seems to falter. It's also great because you can touch it and protect it using whatever means necessary. Overall, it's not tied up in the bank, so it's always available as legal tender in many states.
Why Gold Is an Excellent Inflation Hedge
One of the top selling points for gold is that it will protect you during rising inflation periods. Overall, it's a tangible and actual asset, so it will hold its value when paper currencies don't. They'll lose purchasing power when the inflation rate goes too high.
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Though rising inflation sees gold appreciate, it shouldn't be looked at as perfect. There are countless factors that drive the price, and they fluctuate based on the year. Right now, though, gold is at an all-time high, and that's likely because of the political unrest, unease about the debt ceiling, and more.
Generally, gold rises in price when everything else falters or falls. The US dollar isn't doing well, so gold is up. However, when the US dollar becomes strong again, gold will fall back slightly, though it will still keep its value. This page explains how a precious metals IRA works and why it’s such a powerful safeguard for your retirement accounts.
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Conclusion - Why Gold Is the Top Inflation Hedge
Inflation will always be a problem for investors everywhere. Money is bound to lose value with time, and inflation levels will change based on what's happening in the world and a particular country.
However, investors have inflation hedges to help them, including asset classes like gold, real estate, and TIPS. It's important to create a diversified portfolio that will protect you from dealing with decreased purchasing power.
With the Federal Reserve raising interest rates, this caused stocks to fall. Likewise, cryptocurrency isn't doing well, and higher inflation is the result of all this.
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Companies want to keep operating costs low during inflationary periods, and good inflation hedges are crucial. Precious metals, with gold at the forefront, can protect investors and help them beat inflation. Still, it's unwise to keep all your money in one asset; vary things up by purchasing a treasury bond, energy commodities, and other asset classes. You'll be glad you did!
Disclaimer: The above is a sponsored post, the views expressed are those of the sponsor/author and do not represent the stand and views of Outlook Editorial.
