Investors who invest money in stocks, bonds, and other money-market instruments show concerns about inflation. It is often seen that many retail investors looking out the ways to protect themselves against inflation or to hedge against inflation. Inflation significantly lowers the value of fixed-income investments and cash savings. But, is it possible to make investments that perform well in the inflation period? – Yes!
Certain investments perform well in inflation. Selecting among these assets should be based on your own financial goals and how severe the inflationary environment is.
The solution is to pick the assets that provide variable interests and appreciate over time. Also, it is important to choose investment options that will provide you with a return greater than the rate of inflation – or at least, that keeps up with it.
Below we’ve shared some of the investment choices to hedge against inflation:
When inflation is on the rise, the businesses can extract more from the consumers and as a result, receive good cashflows and hence the stock price should likewise increase. There is no guarantee but historically, the stock market has provided returns that beat inflation. Investing in growth stocks can help investors getting inflation-adjusted returns in the long term.
Gold is another popular inflation hedging strategy because of its direction about rising inflation. Generally, when inflation arrives the price of gold also increases. It is not just gold but other commodities such as silver and copper which rise in value when there is inflation in the stock market. By keeping commodities in an investment portfolio one can take advantage of the inflation period and see rising in value.
Generally, bonds are not good choices to hedge against inflation. It is because of the fixed interest rates throughout the years that make vulnerable to the changing inflation rates. However, some inflation-indexed bonds have interest rates indexed to inflation. It means, the investment returns go up with the inflation rate – and go down with the deflation. Since these bonds are backed by the government, make them the ideal choice for conservative investors.
Investing for inflation is an essential step to protect your wealth from eroding in value. Though inflation erodes your savings, it is important to keep some cash for financial security. Try not to keep too much. Plan your investments for inflation, and select an investment strategy that works in your favor. Choose the assets that provide growth and appreciation. Look out for assets that offer variable interest rates.