Bonds are a lousy idea for inflation hedging in general. Why? Because bonds usually pay a modest fixed interest rate that is determined by the bond’s interest rates. When inflation outpaces or approaches interest rates, the future value of any bond profits is reduced. As a result, each bond payment will be valued less and less over time.
To avoid devaluation, several types of bonds are indexed to inflation. The UK inflation-linked market, for example, has bonds that are indexed to inflation, so their returns keep up with the pound’s depreciation to compensate. These bonds, on the other hand, are usually more expensive than conventional bonds.
In periods of rising inflation, it’s a smart idea to reduce your bond exposure and rely more on high-return assets like equities and shares. Some bonds, on the other hand, can survive periods of strong inflation.
Invest in Real Assets
“Gold, agricultural products, crude oil, and other commodities are examples of “real assets.” Commodities can operate as a store of reserve when the value of government-issued fiat money falls, making them an effective inflation hedge. The primary premise is that because people always require actual assets, they are less susceptible to depreciation. People, for example, will continue to buy food despite economic uncertainties.
Renewable energy, infrastructure, buildings, precious metals, and other assets are examples of assets “Hard” investments can provide a constant income stream that is tied to inflation while also resisting inflation’s depreciating impacts. Real assets have a higher investment cost than financial products such as stocks, but they can help protect your entire portfolio against inflation.
- To learn more about two of the best (and most user-friendly) online platforms for investing in commodities and other real assets, read our eToro vs Trading212 comparison.
Maximise Your Savings
Inflation can devastate your savings, especially if you just set aside a modest portion of your monthly salary. So, if you’re not saving as much as you can, you’re shooting yourself in the foot, especially when you consider future taxes on ISA gains.
As a result, maximizing your savings now is a fantastic method to safeguard the value of your net worth in the future. Using your entire annual ISA allocation reduces the overall taxes you must pay on your savings.
In addition, all donations to a lifetime ISA are matched by the government up to a certain maximum each year. So if you put in 4,000, the government will add another 1,000, bringing the total to $5,000.
By taking full use of these allowances, you can limit the risk of inflation eating away at your retirement savings.
Invest for Value
Inflation is neither a good nor a bad thing when it comes to stocks. Most analysts feel that a range of 2% to 4% inflation is a desirable range for equities and has traditionally been associated with strong market growth.
When inflation is low, growth stocks such as technology and pharmaceutical businesses do very well since the opportunity cost for expansion and growth is comparatively low due to cheap manufacturing costs. However, when inflation is strong, growth stocks’ main attractiveness is jeopardized.
Investing for value is one technique of inflation hedging. In comparison to their investment costs, value enterprises generate large earnings. These assets can be more appealing in a high-inflation climate since they are less expensive to purchase and react better to cyclical growth patterns. Growth stocks, on the other hand, can be wiped out by a single terrible year.
Safeguard Cash with High Interest Products
There’s no denying that inflation is bad for cash. In a high-inflation economy, any monetary assets you have will perform poorly, and cash performs the worst. It’s usually a good idea to keep some liquid cash on hand in case of an emergency, so don’t throw away any cash you have. However, inflation can put a strain on your cash.
A high-yield savings account or money market funds are two options here.
The former can provide an interest rate that is higher than inflation, but there may be limitations on when and how you can utilize the money.
Money market funds are a solid compromise since they invest in liquid assets such as cash and high-credit bonds. Money market accounts are riskier than cash, but in comparison to other types of investments and income transfers, they are quite low risk.
Invest in Real Estate
REITs (real estate investment trusts) are funds that are made up of a variety of real estate investments. When inflation occurs, property and rental prices rise, which can be beneficial to investors who have a stake in those businesses.
REITs are also known for paying out large dividend yields, albeit this may not be sustainable depending on demand for other high-value assets.
REIT investments may lose value if interest rates rise and other assets such as gifts and high-yield bonds become more popular.
Property taxes are another disadvantage of REITs. Property taxes can account for up to 20% of the fund’s operating expenditures, depending on the sort of real estate you invest in. In addition, if property prices fall sharply, REITs can be quite volatile.
- For some good real estate investing advice, read our piece on real estate investing in your twenties.
Think Global, Invest Overseas
On a global basis, you can’t avoid inflation because global GDP is continually increasing. You can, however, park your assets in a country with a lower inflation rate than the United Kingdom.
Many other economies throughout the world, including the United States, Italy, Korea, Australia, Japan, and others, do not rise and fall in lockstep with the United Kingdom. Foreign government bonds, in particular, can be a solid source of income that is unaffected by inflation at home.
How can I safeguard myself against UK inflation?
There is always a ray of hope at the end of the tunnel, and there are steps you can take to mitigate the effects of inflation. From Kinesis Money, here are four simple ideas.
Be wary of holding too much cash
As I have stated, in a rising-priced economic environment, currency might be one of the most significant casualties of war.
So the first thing you should do is figure out how much money you have. Consider whether you require immediate access to it. It’s always a good idea to have a healthy emergency fund on hand, but if you have more than that, you should think about how you might put that money to better use.
Your objectives will be specific to your scenario. However, the first step is to determine whether your money is in risk of being suffocated by inflation.
Move cash out of low-interest current accounts
The next stage is to begin doing something with the money that is at risk. Even the best savings accounts have interest rates that are much below inflation. Getting some type of return, on the other hand, is preferable to getting nothing, and it mitigates the impact of rising prices.
So, if you have a large sum of money in your checking account that you won’t need anytime soon, you should consider shifting it somewhere that pays at least some interest. This might be done through a conventional savings account or, if you’re able to put the money down for a set amount of time, a fixed-rate bond.
Savings accounts are unlikely to beat inflation, but they can be used to mitigate the effects of inflation. The most important thing is to be aware of what’s going on and to recognize that by doing nothing, you’re losing money.
Invest in gold
You may have recently heard a lot of talk about gold. This is due to the fact that gold has long been used as a global inflation hedge.
Gold is a limited resource that functions outside of the traditional financial system. As a result, its price changes aren’t always tied to what’s going on in the rest of the economy or the rising cost of toilet paper.
When the waves are smashing all around you, having at least a tiny amount of gold in your portfolio can help you stay afloat.
Look into other commodities
Gold isn’t the only precious metal that can be used as a hedge. For savvy investors, other precious metals present intriguing potential. Silver is loved by more than just pirates!
Price movements aren’t usually exciting, but they can play a useful role in your long-term investing strategy. You don’t have to limit yourself to pirate booty. Oil, agricultural food, and industrial metals are just a few of the various commodities available (like copper).
You can invest personally or through investment funds in these types of locations if you want to. However, you’ll need a top-rated share dealing account that allows you to invest in alternative assets to have access to all of the markets offered.
How do you protect yourself against excessive inflation?
If rising inflation persists, it will almost certainly lead to higher interest rates, therefore investors should think about how to effectively position their portfolios if this happens. Despite enormous budget deficits and cheap interest rates, the economy spent much of the 2010s without high sustained inflation.
If you expect inflation to continue, it may be a good time to borrow, as long as you can avoid being directly exposed to it. What is the explanation for this? You’re effectively repaying your loan with cheaper dollars in the future if you borrow at a fixed interest rate. It gets even better if you use certain types of debt to invest in assets like real estate that are anticipated to appreciate over time.
Here are some of the best inflation hedges you may use to reduce the impact of inflation.
TIPS
TIPS, or Treasury inflation-protected securities, are a good strategy to preserve your government bond investment if inflation is expected to accelerate. TIPS are U.S. government bonds that are indexed to inflation, which means that if inflation rises (or falls), so will the effective interest rate paid on them.
TIPS bonds are issued in maturities of 5, 10, and 30 years and pay interest every six months. They’re considered one of the safest investments in the world because they’re backed by the US federal government (just like other government debt).
Floating-rate bonds
Bonds typically have a fixed payment for the duration of the bond, making them vulnerable to inflation on the broad side. A floating rate bond, on the other hand, can help to reduce this effect by increasing the dividend in response to increases in interest rates induced by rising inflation.
ETFs or mutual funds, which often possess a diverse range of such bonds, are one way to purchase them. You’ll gain some diversity in addition to inflation protection, which means your portfolio may benefit from lower risk.
What is the best inflation hedge for 2021?
Gold is the earliest form of inflation protection. Between September 2001 and September 2021, the yellow metal has seen an average annual growth of 9.48 percent. Inflation averaged 2.4 percent over the same time period, giving investors a 7.08 percent return.
Just don’t put your entire life savings in gold; there are a few additional things you should know about gold investment.
Additional costs of storing and insuring coins and bullion eat into your returns if you invest in physical gold. Although investing in gold-focused mutual funds and exchange-traded funds (ETFs) can significantly lower these costs, it’s crucial to keep in mind that gold’s price is quite volatile, especially in the near term.
You’ll also need to know whether the goal of your chosen fund is to track the price of gold or to invest in gold mining firms. Both can be profitable methods to play the gold market, but the returns might be quite different.
How does the United Kingdom cope with inflation?
Inflation may have dropped in recent months, but savers still have a fight on their hands if they wish to avoid its corrosive effects.
We’ll look at how taking certain risks with your money can help you keep your money’s value above inflation.
Shift longer term savings into equities
You might have some money in a savings account. After all, it’s recommended that you save away roughly six months’ worth of earnings as an emergency fund. However, you may discover that you have more than you require. If that’s the case, think about putting some of it into investments that have a better chance of long-term growth.
Equities have historically been the most successful assets for fighting inflation over the long term but you must be comfortable with your investments rising and falling in value.
Choose your investments wisely
Other investments, if you know where to search, can produce returns that are higher than inflation. Bond funds, for example, could be included in a portfolio of investments because they invest in debt issued by governments and/or enterprises seeking to raise financing. Throughout their lives, bonds pay a defined rate of interest, known as the coupon, and should refund the original capital at maturity. To spread risk, bond funds invest in a variety of debt instruments.
A financial adviser can help you create a portfolio that takes advantage of all available investment opportunities.
Maximise tax efficiency
After you’ve figured out how to fight inflation, think about how tax-efficient your assets are. ISAs and pensions are both tax-advantaged vehicles for saving and investing for the long term.
ISAs allow you to save up to 20,000 a year in tax-free growth and income on investments, as well as tax-free withdrawals. Meanwhile, depending on your taxable income, pension payments may be eligible for income tax relief of up to 45 percent.
When you can afford it and while they’re still available, it’s a good idea to take advantage of generous tax breaks over time. This way, you may take advantage of compound growth or earning returns on your returns to help you keep up with inflation.
Seek expert advice
A sound investment strategy should include a diverse portfolio of assets and the use of tax-advantaged investment vehicles.
We can put together a diversified portfolio that is tailored to your long-term financial goals, risk tolerance, and inflation protection. Get in contact with us right now to learn more.
During inflation, where should I store my money?
“While cash isn’t a growth asset, it will typically stay up with inflation in nominal terms if inflation is accompanied by rising short-term interest rates,” she continues.
CFP and founder of Dare to Dream Financial Planning Anna N’Jie-Konte agrees. With the epidemic demonstrating how volatile the economy can be, N’Jie-Konte advises maintaining some money in a high-yield savings account, money market account, or CD at all times.
“Having too much wealth is an underappreciated risk to one’s financial well-being,” she adds. N’Jie-Konte advises single-income households to lay up six to nine months of cash, and two-income households to set aside six months of cash.
Lassus recommends that you keep your short-term CDs until we have a better idea of what longer-term inflation might look like.
What do you do with your savings when inflation is high?
As a result, we sought advice from experts on how consumers should approach investing and saving during this period of rising inflation.
Invest wisely in your company’s retirement plan as well as a brokerage account.
What should I do to prepare for hyperinflation in 2021?
Food and water may become more difficult to obtain in the future, which is difficult to accept when you have hungry mouths to feed. Consider dedicating a piece of your property to gardening and fruit tree planting to assist you and your family stay afloat. Alternatively, if you have the funds, you may need to purchase more land with a water supply on its property.
How will you protect yourself from inflation in 2022?
During inflationary periods, stocks are often a safe refuge. This is because stocks have typically produced total returns that have outperformed inflation. And certain stocks outperform others when it comes to combating inflation. Many recommended lists for 2022 include small-cap, dividend growth, consumer products, financial, energy, and emerging markets stocks. Industries that are recovering from the pandemic, such as tourism, leisure, and hospitality, are also receiving a thumbs up.
Another tried-and-true inflation hedge is real estate. For the year 2022, residential real estate is considered as a safe haven. Building supplies and home construction are likewise being advocated as inflation-busters. REITs, or publicly traded organizations that own real estate or mortgages, provide a means to invest in real estate without actually purchasing properties.
Commodity investments could be one of the most effective inflation hedges. Agriculture products and raw resources can be exchanged like securities. Gold, oil, natural gas, grain, meat, and coffee are just a few of the commodities that traders buy and sell. Using futures contracts and exchange-traded funds, investors can allocate a portion of their portfolios towards commodities.
During inflationary periods, bonds are often unpopular investments since the return does not keep pace with the loss of purchasing power. Treasury inflation-protected securities are a common exception (TIPS). As the CPI rises, the value of these government-backed bonds rises, removing the danger of inflation.
TIPS prices rose dramatically in tandem with inflation expectations in 2021. To put it another way, these inflation hedges are no longer as appealing as they were a year ago. Savings bonds, which the US Treasury offers directly to investors, are attracting some inflation-avoiders.
What industries benefit from inflation?
Inflationary times tend to favor five sectors, according to Hartford Funds strategist Sean Markowicz: utilities, real estate investment trusts, energy, consumer staples, and healthcare.
Should I invest in gold to protect myself from inflation?
The best inflation hedge is not gold – Video Many investors feel gold might be a good inflation hedge since it keeps its value while currencies lose value. Stocks, on the other hand, have proven to be a better long-term inflation buffer, according to my study.