What Actually Protects Against Inflation? Discover the Effective (and Ineffective) Inflation Hedging Strategies | ET Money

No one likes high inflation. And yet, that’s what India and other countries are facing. With high and rising inflation posing a big threat to our standards of living. Now, as investors we are exposed to inflation in many ways. There are interest rate changes, consumption patterns can change overnight, growth projections might go for a toss, all of which can bring down our investment portfolios by quite a bit. Let’s start with what a good inflation hedge. Elements from “The Best Strategies for Inflationary Times”: ENERGY Energy as an asset class delivered an average of 41% returns across the 8 high inflation periods that haunted the United States from 1926 to 2020. But from the looks of it, periods of supply-driven inflation remember, not demand but supply-driven inflation seems to bring out the best from energy investments and that’s something investors might want to look out for. Having said this the energy sector does come short when it presents itself as a long term asset class. So while there is that 41% real return during high inflation periods the energy sector averaged a negative 1% return during periods of low or manageable inflation. GOLD Since 1971, the price of gold has grown by about 50 times and so has inflation and it is this apparent correlation between gold and inflation that has led many to believe that gold is a good inflation hedge. You see, If gold were a good and consistent inflation hedge then the ratio of its price to the consumer-price index should have been relatively steady over the years. Firstly, having some gold in your portfolio is useful as it effectively counteracts high inflationary periods plus gold has a weak correlation with equities. Secondly, keeping gold as an asset over the long-term does give reasonable returns but is unlikely to beat equities so that’s another point one needs to keep in mind. REAL ESTATE Firstly, there’s the fact that real estate is an income generating asset and investors do flock towards such safer assets when inflation rises. Secondly and just like what we see with gold or commodities there is the scarcity factor as there is only a limited amount of real estate to work with. EQUITIES Equities have traditionally been viewed as an inflation hedge on the premise that a company’s revenues and earnings would also rise with inflation over the course of time. If you are a long-term investor then your equity investments will probably and handsomely beat inflation but if you are more tactical, then you can do some further research around these specific sectors before considering investing in them CRYPTO Cryptos have a limited supply, they are fungible, meaning one bitcoin can be exchanged for another without any loss in value, they’re also easily accessible, have growing acceptance and cryptos have proven to appreciate in value. But cryptocurrency prices are extremely volatile on account of the speculative activity surrounding and it is hard to see if there will ever be any actual price discovery in this asset. SUMMARY Firstly, if you are an accumulator then relying on equities to beat inflation is a tried, tested and successful strategy which is likely to persist for many more decades. Secondly, investors can explore some reliable buy-and-hold methods to hedge inflation like creating a ladder of individual gilt funds of different maturities. And thirdly, with multiple assets performing differently at various inflation gauges the importance of asset allocation and timely rebalancing only multiplies which is where ET Money Genius and it’s intelligent investing service comes in. 📖 Chapters: 00:00 Introduction 02:48 Energy as Inflation Hedge 04:27 Gold as Inflation Hedge 07:08 Real Estate as Inflation Hedge 08:34 Equity as Inflation Hedge 09:54 Crypto as Inflation Hedge RESOURCES: 🔗 🔗 📝 📝 📝 📝 #ETMoney #Inflation #inflationhedge 👉 To invest in Direct Plans of top Mutual Funds for free, download the ET Money app: ► Subscribe to ET Money Hindi 👉 Read more such informative articles at 👉 Follow us on: ► Facebook: ► Twitter: ► Instagram: ► LinkedIn: ...(read more)

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In times of economic uncertainty, investors often look for ways to protect their wealth against inflation. Inflation is the sustained increase in the general level of prices for goods and services in an economy. When inflation is high, the purchasing power of money decreases, and as a result, the value of investments can erode over time. Therefore, finding effective inflation hedges becomes crucial for investors. There are several investment vehicles that can potentially act as a hedge against inflation. However, not all options are equally effective. Let's explore what works and what doesn't as an inflation hedge: 1. Real Estate: Real estate has long been considered a solid inflation hedge. Historically, property prices tend to rise in line with inflation, if not higher. Rental income can also increase during inflationary periods, providing an additional source of returns. However, it's essential to carefully consider the location and type of real estate investment to ensure its inflation-hedging qualities. 2. Commodities: Commodities like gold, silver, oil, and agricultural products have traditionally been used as inflation hedges. Precious metals, especially gold, are often favored due to their store of value and limited supply. However, commodity prices can be volatile, and their relationship with inflation is not always consistent. While they can provide a short-term hedge, their long-term effectiveness as a tool against inflation remains debatable. 3. Treasury Inflation-Protected Securities (TIPS): TIPS are bonds issued by the government that adjust their principal value based on changes in the consumer price index (CPI). This means that when inflation rises, the value of TIPS increases, providing investors with a hedge. TIPS offer a guaranteed return above inflation, making them a reliable option for risk-averse investors. However, their interest rates can be relatively low, which may limit potential returns. 4. Stocks: Historically, stocks have shown the potential to outpace inflation. Companies can increase their prices and earnings during inflationary periods, leading to higher stock valuations. However, this is not a guaranteed hedge as individual stocks can perform poorly amidst rising inflation. Diversification across various sectors and regions can mitigate this risk. 5. Bonds: Traditional bonds tend to have a mixed track record as an inflation hedge. When inflation rises, bond prices tend to decline, negatively impacting bondholders. However, certain types of bonds, such as TIPS mentioned earlier, have built-in inflation protection. 6. Cash and Savings Accounts: Cash and savings accounts are generally not effective inflation hedges. Inflation erodes the purchasing power of money, meaning cash loses value over time. While it's important to have liquidity, relying solely on cash during an inflationary period can be risky. It's crucial for investors to diversify their portfolios and consider combining different inflation-hedging strategies. Additionally, keeping an eye on economic indicators and adjusting the portfolio accordingly can help protect against inflation risks. In conclusion, when it comes to finding an effective inflation hedge, there is no one-size-fits-all solution. It's essential to evaluate multiple options and consider personal investment goals and risk tolerance. Real estate, commodities, TIPS, stocks, and selected bonds can all play a role in safeguarding against inflation. However, it's advisable to consult with a financial advisor to tailor an investment strategy that aligns with one's individual needs and circumstances. https://inflationprotection.org/what-actually-protects-against-inflation-discover-the-effective-and-ineffective-inflation-hedging-strategies-et-money/?feed_id=129067&_unique_id=64e12a5c01e04 #Inflation #Retirement #GoldIRA #Wealth #Investing #areequitiesagoodhedgeagainstinflation #bestinvestmentstrategiesforinflation #buyinggoldasahedgeagainstinflation #canrealestatehedgeagainstinflation #cryptohedgeagainstinflation #equitiesaninflationhedge #goldasahedgeagainstinflation #howtohedgeagainstinflation #inflationhedge2022 #inflationhedgeinvestments #iscryptoagoodhedgeagainstinflation #isrealestatethebesthedgeagainstinflation #strategiesforinflationarytimes #InvestDuringInflation #areequitiesagoodhedgeagainstinflation #bestinvestmentstrategiesforinflation #buyinggoldasahedgeagainstinflation #canrealestatehedgeagainstinflation #cryptohedgeagainstinflation #equitiesaninflationhedge #goldasahedgeagainstinflation #howtohedgeagainstinflation #inflationhedge2022 #inflationhedgeinvestments #iscryptoagoodhedgeagainstinflation #isrealestatethebesthedgeagainstinflation #strategiesforinflationarytimes