5 Asset Classes to Hedge Against Inflation in Your Investment Portfolio

by MSE Staff | Published 30 Jan 2022 

Inflation is a serious threat to any investment portfolio. Over time, inflation can erode the purchasing power of your assets and cause you to lose money. That's why it's important to include inflation hedges in your investment strategy. There are many different ways to hedge against inflation, but here are five of the most common asset classes:

Real Estate

Real estate is a classic inflation hedge. It tends to do well when inflation is high and does poorly when inflation is low. Real estate investments can be made through direct ownership, REITs, or private equity funds. There are, however, several risks involved with real estate investing, including poor locations, low cash flow, high vacancies, and difficult tenants.

Commodities

Commodities are physical goods or resources that are used for trade. They can be divided into two categories: hard commodities and soft commodities. Hard commodities include metals, energy products, and agriculture products. Soft commodities include livestock, grains, and precious metals. Commodities are inflation hedges because they tend to do well when inflation is high and do poorly when inflation is low. However, there are some risks associated with investing in commodities, including inflation, weather, political upheaval, international situations, new technologies, and even rumors.

Treasury Inflation-Protected Securities (TIPS)

TIPS are inflation-indexed bonds issued by the United States government. They are designed to protect investors from inflation by adjusting the principal and interest payments according to changes in the Consumer Price Index (CPI). TIPS is a low-risk investment, but it also yields low returns.

Gold

Gold is an inflation hedge because it tends to do well when inflation is high and does poorly when inflation is low. Gold is a physical asset that can be stored in a safe place or sold on the market. Gold, on the other hand, has risks such as price fluctuations, theft, storage cost, and other fees.

International Bonds

International bonds are bonds issued by governments or companies in other countries. They are a good inflation hedge because they tend to do well when inflation is high and do poorly when inflation is low. However, other factors, such as interest rates, bond call options, and default risk, must be considered when purchasing international bonds.

Each of these asset classes can help you protect your portfolio from inflation. However, it's important to remember that no single asset class is guaranteed to protect you from inflation. You should always consult with a financial advisor before making any changes to your investment portfolio.

Final Thoughts

Including inflation hedges in your investment portfolio is not a one-size-fits-all solution. Different investors will have different needs and preferences. That's why it's important to speak with a financial advisor before making any changes to your investment strategy. They can help you determine which inflation hedges are right for you and create a plan that best suits your needs. Thanks for reading!