Here are The Best Investments for Inflation Protection

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Gold is one of the most popular assets when investors talk about hedging against inflation. Gold has traditionally been an alternative currency for centuries. Countries whose native currencies are losing value have often relied upon gold. The fact that gold is a physical asset has helped it not only hold its value but consistently grow in value over the years.

Currently, the economic climate has ushered in above-average inflation, and experts suggest the situation is going to worsen. Investors are advised to add assets like gold to their portfolios to protect themselves from the negative effects of inflation.

There are some people that would disagree with gold being a choice asset for hedging against inflation. Analyzing the data from two decades between 1980 and 2000, analysts could deduce the numbers signify a shift in the way gold historically relates to inflation.

The principles of basic economics prove them wrong. Not every inflation cycle is alike. The economic climate in 2021 is not what it was between the years of 1980 and 2000. What happened to gold during that one historical period is not what usually takes place during inflation cycles. Investors can continue to expect gold to do well when inflation ramps up.

Between 1980 and 2000, while interest rates were high, inflation was declining. Gold was less appealing to investors at that point. The economic climate of today is the exact opposite. Inflation is on steroids right now, and the Fed is not keeping up.

Negative interest rates are the result, and money is being printed like it is going out of style. Gold is looking mighty appealing right now.

Other precious metals, oil, natural gas, grain, and more are examples of other commodities that are traded on the open market. Inflation has a unique relationship with the commodities market in general.

If a particular commodity’s price is on the rise, it typically means the products made using that commodity are soon to have higher prices. For example, oil prices go up, and you can bet gas prices are going up.

Investing in commodities using a broad brush is best for most portfolios. To accomplish this, invest in ETFs, some of which are actively managed. Mutual funds are also an option. If you want to keep it extremely simple, a basket of three or four commodities ETFs is ideal. Most investors choose funds that track indexes vs those that are actively managed.

Commodities, however, are considered highly volatile, and therefore, investors should always be cautious and do their due diligence before placing trades. In fact, trading is a huge part of commodities, and so is supply and demand.

Supply levels for particular commodities can increase or decrease based on shifting geopolitical tensions and other fast-paced changes that are part of the news cycle.

Professionals often recommend the 60/40 portfolio rule to investors. What this rule means is your portfolio should be comprised of 60 percent stocks and 40 percent bonds. Of course, there are all kinds of stocks and bonds. Moreover, investors should adjust their portfolio allocations based on their ages.

Still, the 60/40 rule is a great place to start and helps you focus on a more conservative portfolio that is still poised for growth.

A portfolio mix of 60 percent stocks and 40 percent bonds is likely to underperform a portfolio of equities over decades. Yet the more conservative mix provides the right protection and peace of mind. Your investment portfolio will experience less volatility over time.

Additionally, a 60/40 mix is going to help you work against inflation over the years. It pays to diversify your basket of investments, and it takes a lifetime to continue to understand what true diversification means.

REITs are all about real estate and producing income from a portfolio of assets. Real estate investment trusts are known for paying huge dividends. Additionally, if inflation is on the rise, property values tend to be on the rise. Rent increases are also typical.

Real estate investment trusts naturally have their pros and cons. REITs may pay high dividends, but they can be volatile. During economic downturns, they tend to lose more value than the average tickers. The same can be said for BDCs or business development companies.

REITs also suffer sometimes due to rising interest rates. If those interest rates start skyrocketing, people flock to T-Bills and other securities paying better rates at the time. Property taxes of course impact real estate investment trusts, too.

One more thing you need to know as an investor is that the tax rates on REIT dividends is higher on you when filing. The truth is that most REIT dividends are classified as traditional income.

Investors looking for the best upside need to understand that stocks are the name of the game. This doesn’t mean you outfit your entire portfolio with only equities. Businesses working with commodities and other natural resources often lose against inflation. Tech businesses, that require less capital, do better when inflation is on the rise.

The S&P 500 is full of tech companies, as is the trend now. In fact, approximately 35 percent of the companies that make up the S&P 500 are tech and communication companies. These businesses that operate using less capital are winners during high inflation.

Investing in the S&P 500 has its cons, too, though. The index favors large-cap companies, giving them greater influence. You also do not have access to small-cap companies if you stay in the S&P 500 lane. These are the companies that have historically produced the best returns.

Income from rental properties increases when inflation is on the rise. Property values also increase when inflation ramps up. Landlords decide they can increase rental rates, and income subsequently increases overall. It is not easy keeping pace with inflation, but this is one way to make sure it happens.

Real estate, however, has its cons like all investment vehicles. First, real estate is not as liquid as other types of investments. You must be patient when buying and selling real estate unless you want to take a loss. That is why real estate is usually for the big fish.

Properties also must be maintained and managed. Taxes and insurance are also due. Those costs can add up, severely affecting your rate of return.

Leveraged loans are often used by companies that have high debt margins already. Add a low credit score to boot, and you have a higher risk of these loans defaulting. These loans cost the borrower big time, but they can pay off big to investors. You will often see these investment vehicles called collateralized loan obligations.

One advantage of these securities is that these high-risk loans are pooled together. This means you are invested in a basket of these loans and not one at a time.

The floating rate yield for this loan makes them great tools for hedging against inflation. You do have to remember, however, that there are always risks. First, it was mentioned that these loans have a higher rate of default. Second, liquidity is also a risk. Lastly, you simply have fewer protections available to you when investing in these loan vehicles.

Some borrowers run businesses into the ground and are unable to resolve their debts. Additionally, when searching securities that are publicly traded, it is not always easy to find leveraged loans. Traditional loans protect the lenders more. With leveraged loans, fewer protections means the lenders could end up exposed to potentially greater losses.