5 ways to protect your investment portfolio against inflation

May 25 2021, 8:00 am

In April, the annual rate of inflation rose to its highest in nearly 10 years. Gas prices have risen a staggering 62.5% since they plunged a year ago.

It makes sense that investors are starting to panic about their portfolios right now. But as the economy rebounds from a recession it’s only natural that the market shifts with it.

And luckily, there are plenty of ways to pivot your portfolio. After all, if there’s anything we’ve learnt over the past year, it’s how to adapt to uncertain market conditions.

Whether it’s riding a REIT, investing in gold, or cashing in on cryptocurrency, here are five ways to potentially protect your portfolio against inflation.

Commodities

Commodities are ‘basic goods’ that are interchangeable with other goods of the same type—things like grains, gold, beef, oil, and natural gas.

Whenever the inflation scaries pop up, people usually think of commodities like gold and silver because of their intrinsic value. Commodities tend to protect against inflation because demand for them is usually high during times of high inflation, which in turn pushes up the prices.

Investors looking to cash in on commodities can either directly invest into the physical commodity, buy shares in commodity companies, or buy mutual or exchange traded funds of commodities.

Real estate

Since the value of land and property tends to rise with inflation, real estate is another type of investment that’s popular with investors in inflationary times. But investing in real estate doesn’t necessarily mean you have to start putting a downpayment on a house.

Investing in a REIT, aka real estate investment trust, can still give investors access to the real estate market without actually committing to buying real estate. A REIT is a company that owns, operates, or finances income-producing properties.

By investing in a REIT you’re basically investing in a publicly-traded portfolio of properties. It’s a great low-risk way to invest that provides diversification, dividend income, and potentially high returns.

TIPS

If there’s a type of investment that’s going to protect you against inflation, going with the one that has “inflation-protected” in its name seems like a good start. US Treasury Inflation-Protected Securities aka TIPS are a type of Treasury security issued by the U.S. government and are super popular amongst investors in times of high inflation.

That’s because TIPS have their interest rate adjusted according to rates of inflation, with interest payments rising and falling depending on the rate of inflation or deflation. TIPS are popular because they both protect investors from inflation and, with the interest that is paid every six months based on the bond’s auction, also allow investors to make a profit.

Because they’re backed by the US government, TIPs are a great choice for those looking for a low-risk investment.

Stocks

Although some sectors will still perform well during these times, predicting exactly which ones will perform well is very tricky. So it makes sense that during times of inflation, many people will rush to sell off their stocks.

That said, when the economy is on fire, certain sectors are likely to perform very well. In these situations, buying a value stock in an industry like banking can give investors a promising investment opportunity, alongside high dividends.

Buying preferred stock instead of common stock is also a wise move during times like these. That’s because preferred stock—stock that entitles the holder to a fixed dividend— tends to be less volatile than common stock due to its fixed structure.

Crypto

You wouldn’t be wrong to question if cryptocurrency is a solid investment move right now, given the recent crash. And you’re not wrong, it’s a highly volatile sector—and no one can guarantee what’s going to happen next.

But each cryptocurrency also has a limited cap on the available amount investors can buy, which protects the digital asset against inflation. For this reason, some investors have likened crypto to gold.

With it being such a new space, experts don’t know exactly how crypto will handle inflation. Just make sure you invest at your own risk—and make sure you do lots of research before you go getting diamond hands.

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