Whether you’re brand new to investing or your portfolio is filled with stocks, bonds, and other traditional assets designed to build wealth, it’s important to consider the impact of inflation.
What if there were a few key investments you could add to your portfolio that were specifically included to help protect you from inflation?
In this blog post, we’ll explore four of the best investments for inflation and how they can help improve your overall portfolio performance. Keep reading to learn more!
How does inflation work?
When we take a closer look, inflation is actually quite logical.
When prices for goods and services increase, people tend to want to hold on to their money instead of spending it. This decrease in demand (along with an increase in supply) causes prices to level off or even go down. So, over time, the average price of all goods and services will increase.
This is why it’s important for investors to include inflation hedges in their portfolios – because, as we’ve seen, unchecked inflation can have a serious negative impact on your long-term wealth.
Why does inflation happen?
Inflation is a rise in the general level of prices for goods and services in an economy over time. It is measured as an annual percentage increase. When inflation rises, every dollar you have buys a smaller percentage of a good or service than it did before. In other words, your money loses value.
There are several factors that can contribute to inflation, including:
- too much money chasing too few goods and services,
- rising production costs, such as wages and energy prices,
- a decline in the value of the U.S. dollar, and
- government policies, such as tax increases or spending.
How does inflation affect your investments?
Inflation can have a significant impact on your investments, particularly if you have a long-term investment horizon.
When inflation rises, it can erode the value of your investments over time. The best way to combat inflation is to invest in assets that are likely to rise in value at a rate greater than the rate of inflation.
What is the prediction for inflation in 2023 and beyond?
There is not one definitive answer to this question. Inflation can be impacted by a number of factors, including global events and economic conditions. As a result, it’s difficult to make an accurate prediction. However, most economists expect inflation to continue rising over the next few years.
Here are the 4 best investments to hedge inflation:
1. Commodities
Commodities are a good investment for hedging inflation because they tend to rise in value as the cost of production increases. Furthermore, commodities are not dollar-based, so they are less affected by fluctuations in the value of the U.S. dollar. In addition, commodities can be a good hedge against stock market volatility.
Commodities are not at risk in the same way as goods and services, so they can provide a “safe haven” during periods of high inflation. As an added bonus, commodities tend to have low correlations with other asset classes, making them a good addition to a diversified portfolio.
Some of the best commodities to invest in include gold, silver, and platinum.
2. Real Estate
Real estate has long been considered a solid investment for hedging against inflation. Why? Because not only can landlords raise rents to keep pace with inflation, but the underlying value of real estate usually rises along with prices.
Real estate is a good investment for inflation because it tends to rise in value along with the cost of living. In addition, real estate provides investors with two important benefits. First, it’s a tangible asset that can be used as collateral for loans. Second, it offers investors a degree of insulation from stock market volatility.
Some of the best types of real estate to invest in include commercial and residential property.
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3. Stocks
Stocks are a good investment for hedging inflation because they tend to rise in value as the economy expands. Stocks offer investors the potential for capital gains and dividends. Additionally, stocks offer liquidity, which means you can sell them at any time.
Not all stocks offer the same level of inflation “protection”. To find the best stocks to hedge inflation, you’ll want to look for companies with a strong track record of dividend growth.
Some of the best stocks to invest in include technology companies, pharmaceutical companies, and energy companies.
4. REITs
REITs are a good investment for inflation because they tend to rise in value as the cost-of-living increases. Additionally, REITs offer liquidity and dividend payments. Some of the best REITs to invest in include retail, office, and industrial properties.
The benefits of investing in REITs are that they provide investors with a degree of insulation from stock market volatility, and they offer a steady stream of income in the form of dividends.
Conclusion
Inflation is a normal and expected event in any economy, but that doesn’t mean you should expect your investments to lose value over time. If you grow your portfolio with a strategy in mind, inflation can work with you, not against you.
In order to best protect your investments from the effects of inflation, it is important to diversify your portfolio across different asset classes. By investing in commodities, real estate, various stocks, and REITs, you can help ensure that your investments will rise at a rate greater than the rate of inflation.
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