A dollar today would not buy the same value of goods in a decade due to inflation. Inflation basically measures the average price level of a basket of goods and services in an economy. It refers to the increases in prices over a specified period of time. As pointed by Kavan Choksi Professional Investor, as a result of inflation, a particular amount of currency will be able to buy less than before. Hence, it is important to find the right strategies and investments to hedge against inflation.
Kavan Choksi Professional Investor mentions the assets that help hedge against inflation
The level of inflation in an economy keeps changing on the basis of current events. Rapid increases in raw materials and rising wages are some of the major factors that contribute to inflation. Inflation is a natural occurrence in the market, and there are many ways to hedge against inflation. Here are a few types of assets that can provide protection against inflation.
- Gold: Gold is a physical asset, and tends to hold its value for the most part. Due to their intrinsic value and limited supply, precious metals like gold have been used historically as a hedge against inflation. Gold is widely popular among investors across the world
- Commodities: Commodities are quite an expansive category. It includes grains, natural gas, electricity, as well as oil, natural gas, and agricultural products. Commodities and inflation have a unique relationship, wherein commodities are an indicator of inflation to come. When the price of a commodity rises, so does the price of the products that the commodity is used to produce. Today it is easy to broadly invest in commodities through exchange-traded funds (ETFs). Commodities typically serve as inflation hedge due to their essential nature in the economy.
- 60/40 Stock/Bond Portfolio: This is considered to be a traditional, safe mix of bonds and stocks in a conservative portfolio. A 60/40 stock/bond portfolio is a straightforward and simple investment strategy.
- Real Estate Investment Trusts (REITs): REITs are companies that own and operate income producing real estate. Rental income and property prices generally go up as inflation rises. A REIT comprises of a pool of property investments that pay out dividends to its investors
- S&P 500: Stocks are likely to have the most upside potential in the long term. Broadly speaking, businesses that gain from inflation are those that require little capital. At the moment, the S&P 500 has a high concentration of technology businesses and communication services. Both communication and technology services are capital light businesses, and hence are likely to fare well during inflation.
- Real estate income: Real estate income is basically the income earned from renting out a property. As inflation rises, so do property values and hence landlords can change more as rent. This results in the landlord earning a higher rental income over time.
As mentioned by Kavan Choksi Professional Investor, disciplined investors can plan for inflation by investing in asset classes that outperform the market during inflationary climates. Diversification across various asset classes can help build a portfolio that offers protection against inflation.
