Inflation Hedges.
Investors are increasingly concerned about the state of the economy and how inflation will harm their investment portfolios. The combined effect of the covid lockdowns, printing billions of pounds to prop up the economy, and the bank of England’s reduction of interest rates at the time has meant that we have a huge deficit to fill. On top of that, the cost of living crisis and the energy crisis is squeezing the last bit of money out of people’s wallets.
Here are several different investments options to help hedge against inflation and ease the effects of a worsening economy.
Precious Metals.
Precious metals such as gold, silver, and platinum have long been seen as instrumental hedges against inflation. Over the long term, these metals have seen growth in prices that have outpaced inflation. The reason for this is that they are the raw materials with so many uses such as medical and electronic equipment and jewellery.
How To Invest in Precious Metals.
There are different ways to invest in precious metals.
Physical investments: One of the most common options is to buy precious metals outright and store them in a safe place, usually a vault.
Investing in mining companies: As the prices of metals go up, the miners generate more profit from their operations. Investing in mining stocks is a solid way to invest in the asset.
Precious Metal Funds: Investing in Exchange Traded Funds (ETFs) and mutual funds that prioritise precious metals.
Commodities
The term commodity is used to describe a wide range of raw materials such as:
Energy: Oil and natural gas are essential to meet the needs of developing countries.
Building materials: Stone, wood, iron ore, and other building materials tend to rise when inflation does too.
Agricultural Products: Corn, Wheat, beans, and more will all increase over time with inflation.
Livestock and Animal Products: Meat, milk, and eggs are a staple within the western diet. As prices rise so do these commodities.
How To Buy Commodities.
Although it is possible to buy physical commodities, most do not have the space or the desire to store large amounts of products. The best way to enter into the commodity market is through purchasing mutual funds and ETFs that track the market and allow you to invest in a variety of products instead of choosing individual stocks that are subject to market forces. Pay particular attention to funds with higher diversity of holdings and lower expense ratios so profits are kept to the maximum.
Stocks
One of the best and most popular ways to fight inflation as an investor is to invest your money into the stock market. A well diverse portfolio of high performing stocks can generate annual returns of 10% and higher, which can help you outpace inflation.
During an inflationary period, where consumers are paying more for goods and services, corporate profits tend to shoot up, sending their stock prices up too.
Open a brokerage account: an online broker such as E-toro, Trading 212 and Interactive Brokers can offer stocks to purchase on the live market.
Sign up to a Robo-advisor: these advisors allow you to take advantage of the market without having much knowledge or experience of it. Simply leave the investing process to them.
Invest in funds: Investment-grade funds like ETFs and mutual funds provide access to the whole or specific sectors of the market. The S&P 500 in the US and the FTSE 100 in the UK are the most popular ETFs. These are made up of the biggest worldwide companies and you can invest in these companies through these ETFs.
Real Estate
Property values tend to soar during an inflationary period. Growth in the market in 2021 and the beginning of 2022 has followed that trend. Purchasing property, if possible, is a great way to certify and secure your money against inflation.
A fixed-rate mortgage will allow you to maintain your biggest monthly outgoings for your house at the same rate. Other monthly outgoings will likely rise, such as bills but your mortgage payments will be the same. Those who have locked in low interest and fixed rate mortgages for 2 – 5 years within the UK during an inflationary period will benefit from this. Of course, by owning a home, you will also benefit from increasing value over time. With more money flooding the market, your asset value will appreciate too.
Those who rent, sadly wont, as landlords are likely to raise rents inline with inflation.
Another way to invest within property is real estate investment trusts (REITs). These are fund made up of different real estate investments. As property prices increase during inflation, investors within REITs can expect pay-outs through dividends.
As 2022 comes close to an end, it will be known as the year of inflation. An important lesson to be taken away from this year is the importance of adjusting your investment strategy. As you look for opportunities to invest, be sure to do your research and understand how each investment will benefit your overall portfolio.