How to Hedge Against Inflation With Different Investments

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May. 24 2021, Published 1:55 p.m. ET

Various investment products serve different purposes. They all have benefits of their own, but they are also susceptible to certain risks. During a high inflation rate period, certain products can help you hedge or balance the risk of your overall portfolio. 

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Which investment products can help you hedge against inflation as it occurs? Which products will work best for you?

REITs tend to have bigger gains during inflation.

REITs are a common hedging mechanism during inflationary climates. They are an indirect way to hold a stake in a diverse array of real estate that produces income. The profit comes primarily in the form of dividends and can help investors preserve their wealth despite a loss in value. 

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Equity REITs tend to produce slightly higher returns than all REITs over the short and long term.

Tangible real estate can help you hedge against inflation, too

The seller's market has yet to cease. Unlike other assets, the housing market isn't in a bubble because the price hikes are directly related to issues of supply and demand. This means that all signs point to appreciation for investors who purchase property now.

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Real estate income can help you hedge against inflation since U.S. home prices increased 12 percent in February, while inflation rose 1.7 percent during the same period.

As for building new construction, overpriced wood will reduce your returns unnecessarily.

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Are digital assets like crypto worth the headache or should investors stick with gold?

Bitcoin's one-month realization is down 30 percent. However, it's up nearly 300 percent over last year. A modern alternative to gold for hedging against inflation, many experts question if cryptocurrency as a whole is still a viable option. 

With price points way down, cryptocurrency can still deliver a hedge against the dollar. However, gold currently has less volatility than cryptocurrency, which could reduce the risk. As an insurance mechanism, U.S. gold futures are up while gold prices are at their highest since the beginning of the year.

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Impact investors will have to weigh crypto's sustainability concerns with gold's social and environmental justice issues.

If sticking to stocks and bonds during inflation, consider value stocks and the 60/40 split rule

If you want to maintain a simple yet diversified portfolio, stocks and bonds can still help you hedge against inflation. There are a few ways to approach this strategy:

  1. Focus on value investing. Historically, value stocks have held their stance stronger than growth stocks. This is because value stocks usually see mature returns sooner than growth stocks, despite the fact that growth stocks hold their gains further out.

  2. Hedge against risk using the 60/40 split role. Hold 60 percent stocks (more potential returns, more risk) and 40 percent bonds (less returns, less risk). This is a common tactic as investors get closer to retirement.

Whatever you do to hedge against inflation, maintain a watch list.

Even if you aren't ready to invest in real estate, crypto, or other assets, do yourself a favor by building a watch list. Keeping a finger on the market's pulse will help position you for a quick investment when the opportunity strikes. This is especially important because inflationary swells are often unexpected.

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