Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
6 Investments That Hedge Against Inflation
Ruby Layram
3rd Sep 2024
Inflation can feel like an invisible thief, slowly eroding the value of your hard-earned money. One minute, your savings seem healthy, and the next, the cost of everything from groceries to housing has crept up, leaving you with less purchasing power than before.
But there is some good news! You don’t have to sit back and let inflation eat away at your wealth.
With the right investments, you can hedge against inflation and protect your money from losing its value over time.
In this article, we’ll explore six investments that hedge against inflation, and I’ll share some practical tips on how to incorporate them into your portfolio.
- Gold
- Property
- Bitcoin
- Stocks
- Gilts
- Commodities
- The importance of diversifying your portfolio
- Things to be wary of when investing in assets that hedge against inflation
1. Gold
When you think of hedges against inflation, you probably think of Gold.
And for good reason!
Gold has been considered a store of value for centuries, and it tends to hold its value well, even when inflation is on the rise. Unlike paper currency, gold isn’t something that can be printed or devalued by governments, making it a safe haven for your wealth.
There are several ways that you can add Gold to your portfolio. You can buy physical gold in the form of coins or bars (also called billions!), invest in gold ETFs, or even purchase shares in gold mining companies.
Gold often performs best during times of economic uncertainty. So, while it might not generate income like other investments, it’s a reliable store of value that can help protect your portfolio from inflation.
2. Property
Another popular inflation hedge is property.
This investment has both the advantage of appreciating in value over time as well as providing a steady income through rent.
As inflation rises, so too do property values and rental income, which can help offset the impact of rising prices elsewhere.
Investing in property doesn’t necessarily mean buying a house or an apartment building, though. If you’re not ready to become a landlord, you can still benefit from real estate by investing in Real Estate Investment Trusts.
These are companies that own income-producing real estate, and they typically pay out regular dividends to investors. REITs offer a more hands-off approach to property investment while still allowing you to hedge against inflation through property.
3. Bitcoin
A lot of people are a bit sceptical about Bitcoin, and for good reason! But hear me out.
While Bitcoin is often associated with its volatile price swings, it’s also increasingly being viewed as a digital alternative to gold .
Like gold, Bitcoin is a finite resource (there will only ever be 21 million Bitcoins in existence), and it’s decentralized, meaning it cannot be controlled by any government or central bank.
Bitcoin’s value tends to rise when people lose confidence in traditional financial systems, which can happen during periods of high inflation.
For this reason, many investors see it as a hedge against inflation. If you’re comfortable with a bit of risk and interested in diversifying your inflation-hedging strategy, Bitcoin could be worth considering.
4. Stocks
Stocks might not be the first thing that comes to mind when you think of investments that hedge against inflation, but they can actually be quite effective.
When inflation rises, companies often increase the prices of their products. This can lead to higher profits, which can boost stock prices.
Of course, not all stocks are created equal when it comes to hedging against inflation. Companies to look for are those that won’t lose customers, even if prices rise. Think of consumer staples like food and beverage companies, utilities, and healthcare providers.
These companies can maintain their profit margins even as costs rise, making their stocks a potentially strong hedge against inflation.
You could also invest in stocks that pay dividends. Dividend-paying stocks provide a regular income stream, which can help offset the impact of inflation on your purchasing power.
Plus, many companies that pay dividends tend to be well-established and financially stable, making them a safer bet during uncertain times.
5. Gilts
Next on our list, gilts – or government bonds – can be an effective hedge against inflation. Especially inflation-linked gilts.
In the UK, inflation-linked gilts are bonds issued by the government that pay interest adjusted for inflation. This means that as inflation rises, the interest payments you receive will increase as well, helping to protect the value of your investment.
While gilts may not offer the high returns that other investments might, they do provide a level of security and predictability that can be very appealing. They’re backed by the UK government, which means there’s very little risk involved (but still some risk!).
6. Commodities
Last but not least, we have commodities. Commodities include raw materials like oil, gas, metals, and agricultural products. What makes them an effective hedge against inflation is that their prices tend to rise when inflation increases.
After all, when the cost of producing goods goes up, the prices of the raw materials used to make those goods often go up too.
There are numerous ways to gain exposure to these assets. However, the easiest way to invest in commodities is through an ETF.
It’s worth noting that commodities can be quite volatile, as their prices are influenced by a wide range of factors, from supply and demand dynamics to geopolitical events.
The Importance of Diversifying Your Portfolio to Hedge Against Inflation
While each of the investments we’ve discussed has its own strengths as an inflation hedge, the key to protecting your portfolio from inflation is to diversify.
By spreading your investments across different asset classes, you can reduce the risk that comes with putting all your eggs in one basket. This way, if one investment underperforms, others in your portfolio may balance things out.
Remember, investing always comes with a bit of risk. But diversifying can help to reduce this risk.
Things to Be Wary of When Investing in Assets That Hedge Against Inflation
While the investments we’ve discussed can help protect your portfolio from inflation, it doesn’t mean that they are safe.
Here are a few potential risks to keep in mind:
- Volatility: Some inflation hedges, like Bitcoin and commodities, can be quite volatile. While they have the potential for high returns, they can also experience significant price swings, which may not be suitable for all investors.
- Liquidity: Some investments, like property and certain commodities, can be less liquid than others. This means they may take longer to sell or may not be as easily convertible to cash in a pinch.
- Costs: Investing in physical gold, property, or commodities can come with higher costs, such as storage fees, maintenance costs, or transaction fees. Be sure to factor these costs into your investment decision.
- Economic and political factors: The performance of inflation hedges can be influenced by broader economic and political factors. For example, government policies, interest rates, and global events can all impact the performance of these investments.
By being aware of these potential pitfalls and taking a thoughtful approach to your investments, you can build a portfolio that’s well-prepared to help you achieve your long-term financial goals.
Investing in assets that hedge against inflation is a smart move, especially in today’s uncertain economic environment. Whether you choose to invest in gold, property, stocks, or another asset, the key is to do your research, stay informed, and diversify your portfolio.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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