The Top 5 Ways to Hedge Against Inflation


how to hedge against inflation

Bonds usually offer a fixed payment for the life of the bond, meaning bonds have their broad side exposed to rises in inflation. One way to mitigate that effect, however, is with a floating-rate bond, where the payout rises in response to upticks in interest rates caused by rising inflation. When people say their dollar does not stretch as far as it used to, they are talking about the effects of inflation on their earnings or wealth. Inflation reduces the purchasing power of their money, so each person prefers their earnings and investments to outpace inflation so they are able to afford more things, even if their prices rise. Many of these investments are complex instruments, and novice investors may be wise to buy them through a mutual fund or exchange-traded fund (ETF).

Real Estate Index (VNQI) offers broad-based exposure in properties around the world. The iShares TIPS Bond ETF (TIP) tracks the performance of inflation-protected U.S. The Lord Abbett Floating Rate Fund (LFRAX) is one good choice for those who seek exposure in lower-grade corporate loans.

Investors can build a portfolio that acknowledges and seeks to mitigate inflation risks. Relying on equities relative to fixed income, and focusing on cyclical sectors and real estate could prove to be effective approaches, while excess cash seems unattractive. Meanwhile, borrowing and addressing existing liabilities while policy interest rates are still low may be advisable. The U.S. government regularly adjusts the principal value of TIPS based on inflation determined by changes in the Consumer Price Index.

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Therefore, investors should invest in quality stock forecasting software to help make informed decisions and accurately time the market. When utilizing hedging strategies, investors may buy and sell a number of securities in a string of short-term positions. When doing so, they may make themselves liable to capital gains taxes on any profitable trades. Therefore, this is an important aspect to price in when looking to hedge inflation in the stock market.

Unfortunately, the opposite happens, and the only way to fight inflation is to make more money, which is why an overwhelming number of investors turn to real estate. In fact, the replacement cost of buildings and structures generally increases over time, due to the impact that inflation has on the cost of labor, supplies, and raw materials. Investing in defensive stocks can help insulate your portfolio from inflation’s negative effects. They may not provide the same upside potential as more cyclical stocks during periods of economic growth, but they will help to preserve your capital during tough times.

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For example, an investor may acquire an investment with an annual return of 5%. However, at the end of the year, when the investor plans to sell the investment, the inflation rate accelerates to 6%. It means that the investor will suffer a loss of 1%, which is a loss in their buying power. Investments in derivatives may involve risks different from, and possibly greater than, those of investments in the underlying securities or assets. For example, in the chart below, short-term Treasury inflation-protected securities (TIPS) have the highest correlation to inflation among the asset classes in the study. When inflation goes up, there’s a correlation of 0.45 (out of 1.00) that short-term TIPS will move in the same direction.

how to hedge against inflation

On the surface, foreign currency funds may look very similar to traditional equity funds. Foreign currency is a popular inflation hedge because the value of the US dollar, considered a global and a safe haven currency, frequently rises and falls. The dollar value fluctuates based on interest rates and economic growth. Choose an investment strategy that’s likely to give you a return that at least keeps up with the inflation rate.

The post-pandemic era, however, may change how real estate responds to higher inflation. “Fundamentals are somewhat in question because of the long-term effects of Covid,” Arnott says. Demand for commercial real estate, such as office and retail spaces, is still in limbo as more companies are adopting remote work or hybrid models.

N’Jie-Konte recommends setting aside six to nine months for single-income households and six months of cash for two-income households. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. If one company performs poorly, the performance of the others can offset its losses, minimizing the impact on your money. For example, if the CPI increases by 2% over the course of a year, the return on a TIP will also increase by 2%.

This provides some degree of security against the eroding purchasing power of your investments due to inflation. It is a difficult and uncertain time to be an investor, as inflationary pressures appear to be on the rise globally. A survey showed that 64% of leading economists believe we are headed towards a global recession in 2023.

Should You Buy Gold During High Inflation?

Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive. But we do still expect a relatively brisk pace of increases for both prices and wages. We think investors can take three approaches to navigate this environment. Serving the world’s largest corporate clients and institutional investors, we support the entire investment cycle with market-leading research, analytics, execution and investor services. Treasury Inflation-Protected Securities (TIPS) are the most likely savings bonds to serve as a hedge against inflation.

  • For instance, if you have €10,000 in a traditional savings account that offers 0.5% interest, your balance will only grow by €50 after one year.
  • But as inflation hit the rest of the world in 2022, the US Dollar strengthened once again.
  • In the next section, we show you how to hedge inflation through the right investments.
  • TIPS bonds pay interest twice a year at a fixed rate, and they are issued in 5-, 10- and 30-year maturities.

Passive index investing is the easiest way into stocks, and doesn’t rely on an aptitude for stock-picking. Technology and other growth stocks, which outperform the overall market, make the most solid hedges against inflation. Consumer goods companies and others in the defensive sector, which produce basics people need, also do well. The main reason why companies engage in inflation hedging is to protect their investments from loss of value during periods of inflation. Certain types of investments increase in value during normal economic cycles but decline during inflationary cycles after factoring in the effects of inflation. Like long-dated bonds, long-dated fixed-rate CDs lose their attractiveness if inflation rises.


With online banking more widespread and adopted, there are now many online banks that offer very few services, but much more competitive interest rates on savings. Typically, these investments need to be a minimum of $5,000 to obtain favorable rates. Inflation may reduce the value of a currency, but gold and precious metals have held their relative value and purchasing power remarkably well throughout history. In addition, they have typically been in vogue during inflationary periods because they have historically preserved purchasing power. US Treasury bonds are often looked to by investors for the income they provide. Treasury securities are debt instruments taken out by the U.S. government (other nations also issue their own bonds), and they pay interest and also return the principal.

  • Even when entering into certain positions in order to hedge against inflation, make sure you are maintaining a good level of diversification that aligns with your overall investment strategy.
  • As a result, investing in commodities can help to hedge against an inflationary environment.
  • Here are some investment options to consider when thinking about what to invest in during high inflation.
  • In addition, since REITs are traded on major exchanges, they can be easily bought and sold if the need arises.
  • In Singapore, this material is distributed by JPMCB, Singapore branch.
  • The iShares TIPS Bond ETF (TIP) tracks the performance of inflation-protected U.S.

With a long-term mortgage you’ll lock in funding for up to three decades and can even refinance if rates go lower, giving you an attractive option on lower rates there. TIPS, or Treasury inflation-protected securities, are a useful way to protect your investment in government bonds if you expect inflation to stay high or speed up. These U.S. government bonds are indexed to inflation, so if inflation moves up (or down), the effective interest rate paid on TIPS will too.

Make a list of your financial goals in order of priority, like retirement, higher education of children, or down payment for your home. High inflation eats into your savings, and your monthly expenses go up. Investment strategies to hedge against inflation will differ from individual to individual since your needs and earning potential are unique. You can invest in real estate through REIT (Real Estate Investment Trusts). Inflation can be a difficult concept to understand, but it is important to stay informed about the potential impact it can have on your investments.

Moving your money to a high-yield savings account will help ensure to some extent that your money keeps up with inflation. This is because these accounts typically offer higher interest rates than traditional savings accounts, which can help grow your savings and offset high costs of living. Real estate can also be a great tool to hedge against inflation, as it is a physical asset that tends to increase in value over time. In addition, real estate provides the added benefit of generating rental income, which can help to offset any losses in your portfolio due to inflation.

how to hedge against inflation

We measure inflation with the “inflation rate,” calculated as a percentage of change of a price index (a representative sampling of goods and services) from one year to the next. Inflation refers to rising prices on goods and services across an economy over a period of time. Real estate traditionally does well during periods of higher inflation, as the value of a property can increase.

So no one really knows how inflation will affect bitcoin and its characteristically volatile behavior. Certainly, its performance has been puzzling vis-a-vis inflation of late. Bitcoin doubled from mid-December 2020 to early January 2021, as inflation started to heat up. But then, with no apparent easing of inflationary pressures, between Jan. 8 and Jan. 11, it lost 25% of its value. A recent Pew Research Center survey found that inflation is Americans’ top concern, followed by health care affordability, violent crime and gun violence.

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