Inflation is a common issue in economies worldwide, and it can be tough to predict when or how it will start to rise. That’s why it’s important to have strategies to protect your money against inflation. Here are five ways you can do that!
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The Top 5 Ways to Hedge Against Inflation
These are five asset classes to consider when protecting yourself from inflation. The types of investments range from equity securities to debt securities to alternative investments. Generally, they carry different degrees of risk, but for the individual investor, all of them can be viable choices to protect their money.
1. Reallocate Money Into Stocks
If inflation returns, it is likely negative for the bond market and potentially positive for the stock market. Equities are likely to have better potential growth, so reallocating up to 10% of your portfolio from bonds may be prudent.
A 60/40 stock/bond portfolio is considered a safe, conservative mix of stocks and bonds. For example, the Dimensional DFA Global Allocation 60/40 Portfolio (I) is regarded as a particular portfolio composition. The people who prefer this portfolio typically take a moderate risk but attain good results in their investment goals because it’s flexible and diversified.
You can also invest in shares that pay a higher yield than most bonds, while they may not decline in value as much during periods of inflation. Preferred stocks are liquid and offer convenience down the long-term horizon. Your money will be safe as it sits in these stocks over time.
Utility stocks represent an alternative for those who want their investments to rise in price and dividends but do not necessarily require them to grow the way stocks in crowded industries will.
2. Diversify Internationally
Many Americans usually invest in stocks, bonds, or both for retirement. These investments can be profitable long-term but may result in losses during high inflation. The risk of increasing investments outside the U.S. is a good strategy for American investors with inflation concerns.
In contrast to other major economies, countries such as Italy, Australia, and South Korea do not always rise and fall in tandem with domestic market trends. Adding stocks from these countries to your portfolio can help hedge against local economic cycles. Bonds from foreign issuers may
expose investors to fixed-income securities, which will not drop in price if inflation appears domestically.
Exchange-traded funds (ETFs) are easy options for international investors or people who want to add to their investment portfolios. ETFs are inexpensive for buying international stocks because of their low management fees. Investors may consider adding a more internationally-accessible option such as a global index fund if you own U.S. index funds.
3. Consider Real Estate
With many advantages, investing in real estate is the best option. With this asset class, you will receive dividends on the product, and its value may increase as inflation rises. The demand for homes and their value will always be about monetary values and other factors.
Real estate is a tangible and illiquid asset, which means it’s not easy to sell. With REITs, you can invest in companies that own, operate, and rent commercial, residential, and industrial property and receive income through rents and leases. Their potential to generate higher yields makes them a more attractive investment than bonds.
Key advantage: They aren’t be affected by rates, which will remain relatively stable. An example of an investment fund that offers broad exposure to real estate with a low expense ratio is Vanguard Real Estate ETF VNQ.
4. Look to TIPS
Treasury inflation-protected securities (TIPS) are U.S. Treasury bonds designed to increase in value at the same inflation rate. Since the U.S. federal government backs them, they’re considered one of the safest investments in the world.
TIPS are bonds that are linked to the Consumer Price Index. They have an adjusted amount, and for interest, they calculate with a fixed rate of two times per year. The principal rises and falls according to inflation and deflation, respectively. TIPS come in three extremes: five-year, 10-year, and 30-year.
There are risks to TIPS. They depend on interest rates and, therefore, are sensitive to sudden changes in the market. If you sell your investment before maturity, you may lose some money.
5. Buy Bank Loans
With inflation, some industries can prosper. Banks, for example, earn more money when interest rates rise and profit off the increased costs of loans. In case of a rate hike or market fluctuation, protecting yourself from the potential downside by investing in senior secured loans is a smart move for your portfolio. The Lord Abbett Floating Rate Fund (LFRAX) is an example fund offering fixed returns coupled with risk protection and capital appreciation on your investment.
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