Inflation and Your Investments – Hedging Strategies for 2023

Inflation and Your Investments – Hedging Strategies for 2023

Inflation reduces your purchasing power and can have an adverse impact on investment strategies. But there are strategies available that may produce positive real returns as a hedge against inflation.

Gold, commodities and consumer-focused stocks that pass along higher supply chain costs to consumers can help offset inflationary pressures. Treasury Inflation Protected Securities (TIPS) may also offer protection from rising inflation.

Diversify Your Portfolio

Inflation can be difficult to anticipate, but having an investment strategy in place can help protect against it. Diversified portfolios that include assets from all three major asset classes–stocks, bonds and real estate–can help preserve real value of savings accounts and support long-term goals.

Due to inflation, investors may notice their money stashed away in checking or basic savings accounts decreasing in purchasing power over time. Furthermore, inflation could affect investments held outside liquid accounts such as corporate debt and real estate holdings.

As such, it’s wise to diversify your portfolio with assets that have proven successful during periods of inflation, such as gold and commodities – or create an overall balanced and diversified portfolio with allocations to stocks and bonds such as Treasury Inflation-Protected Securities (TIPS). TIPs bonds may also offer protection from inflation.

Inflation can be an opportunity for stock markets, and diversifying your portfolio with at least 10% equities could help offset its effects by allowing you to purchase more goods and services while spending less of your own money. Dividend-paying stocks such as consumer staples companies which pass increased costs onto consumers can help protect against rising prices and diminishing purchasing power.

Invest in Commodities

inflation can eat away at the real value of your investments over time. While no investment strategy or portfolio can guarantee full protection from every market force, with careful management you can reduce its effects.

One way to hedge inflation is through investing in commodities. Energy-related commodities and broad commodity baskets like SPDR S&P Metals & Mining ETF (XME) have recently gained increased attention due to inflation fears.

Although these investments don’t offer cheap returns, they offer potential for high returns that have low correlation to stocks and bonds – and provide protection from weakening currency and other negative economic events.

Renewable energy investment trusts may also offer an effective means of protecting against inflation. These companies often generate much of their cash flow in dividend payments, providing an additional inflation hedge. They have historically outshone the S&P 500 when inflation was at least three percent.

Equities have not historically provided adequate protection from inflation. Indeed, data over the past 123 years reveals that stocks were often hit harder by inflation and lagged behind bonds as an investment vehicle. That being said, if inflation will remain relatively mild then equity may not be your best bet; you might consider switching over to TIPS funds which adjust values of their underlying bonds to help combat inflation instead.

Invest in Real Estate

Many investors understand that inflation can eat into their purchasing power and reduce savings value over time, yet many don’t know how they can protect their investments from this risk while meeting their financial goals.

Diversify Your Portfolio Diversifying one’s portfolio is key to protecting against inflation. Investors with allocations in major asset classes — stocks, bonds and property — stand the best chance of keeping pace with rising costs due to inflation. While niche assets like commodities and alternative investments may offer additional protection in an overall portfolio.

Real estate investments can provide another excellent way to weather inflation or even slightly outstrip it, and offer diversification benefits that help offset rising prices. You have multiple investment options when purchasing direct properties or REITs or investing in specialized property funds; inflation has even proven beneficial for rental markets which provide passive income that helps counteract its effect.

As you prepare for inflationary pressures, it’s essential that you work with a financial advisor who can explain how inflation could wreak havoc with your portfolio and long-term financial goals. SmartAsset’s free tool connects you with advisors in your area who can develop an inflation hedging plan tailored specifically to you and your risk tolerance.

Invest in Equities

No matter its magnitude, inflation can have an adverse impact on your portfolio and savings value. By diversifying with assets that could grow faster than inflation over time, you can help safeguard its buying power over time.

To protect against inflation, invest in asset classes which have historically performed well under inflationary pressure – including real estate, commodities and some specialized equity options that might actually keep pace with or even benefit from it.

Consider investing in oil and gas companies as they often experience greater price increases when inflation rises, or consumer cyclical stocks which have the ability to pass along higher costs to consumers without denting demand. Furthermore, certain stocks offer inflation protection with built-in Inflation Protected Bond (IIP) payouts so their value rises along with inflation rates.

No investment can guarantee outpace inflation risks; however, by considering your financial goals, investing horizon and risk tolerance you can come up with an effective plan for protecting yourself while still reaching your investing goals.