5 Types of Investments to Hedge Against Inflation

To avoid losing spending power due to inflation, it’s important to consider it when assessing potential returns on investments. However, with smart asset selection, it’s possible to match or even exceed inflation rates. This article outlines five types of investments that can help hedge against inflation. As a real estate syndication company, Life Bridge Capital provides investment partners with the chance to earn passive monthly income through shares of multifamily rental properties.

What is Inflation?

Inflation is an economic phenomenon that reduces the value of assets over time due to the decline in their purchasing power. For instance, a few dollars spent on buying a horse in the past may seem impossible now. Inflation rates vary depending on the currency and year, but it is a guaranteed factor in the economy of the United States. While Social Security and pensions have cost-of-living adjustments to tackle inflation, investors must have a strategy to keep the value of their assets from depreciating. One way is to invest in assets that can maintain or increase their value over time to hedge against inflation.

1. TIPS

Government-backed bonds known as Treasury Inflation-Protected Securities (TIPS) are designed to adjust their interest rates with inflation, which allows them to not fall behind during inflationary periods. Although they are not perfect, they can be purchased in different maturities, and it’s possible to redeem them before maturity. However, their interest rates are lower than other government securities, and their semi-annual interest payments are subject to taxation even if not withdrawn.

2. Gold

Gold often retains its value against inflation thanks to its tangible nature, even in spiraling economies. However, it does not top the list of assets to hedge against inflation, because it does not produce yields for the holder. Over-relying on gold, especially when rates are high, leads to a loss of possible interest or other income had the funds been invested elsewhere.

Gold investment has moved beyond bars buried in the backyard. Several gold-price-based ETFs now exist to allow for gold investment without managing physical bars.

3. Floating-Rate Bonds

Another bond option to hedge against inflation is a floating-rate bond, also called a floating-rate note. These bonds, which the U.S. government has issued since 2014, feature an interest rate that adjusts periodically. Benchmarks for the rate vary based on the specific bond but are often tied to the Fed funds rate. 

4. Stocks

While traditional, fixed-rate bonds offer security in many ways, they do not stand firm against inflation. As a result, many investors prefer to increase their stock-to-bond ratio to 60/40. 

Stocks’ short-term ups and downs can be a nail-biter, but they offer a potential long-term solution against inflation. Companies that can raise their prices with inflation are the best bets—as their profits increase, so too should the stock price.

Consider purchasing preferred stocks to retain a high yield but avoid a significant price drop. Utility stocks with their steady dividends may also be a good option.

5. Real Estate

Real estate is the clear winner on this list, offering many ways that investors can use it to build an inflation-ready portfolio. Investment in income-producing property, for instance, avoids the low-or-no-yield conundrum created by some of the options above. 

Real estate values tend to rise during inflationary periods, as do rents—but the cost of operating real estate typically remains the same. This makes real estate a good investment for the average homeowner but an even better prospect for an owner or investor of income-producing properties. The good news is that there are several ways to invest in real estate some of which do not require owning or managing any physical property at all:

REITs

Real estate investment trusts (REITs) offer an opportunity to invest in income-producing real estate without directly purchasing property. As a shareholder in a REIT, you can receive dividends from the company’s income-generating properties, which can include medical buildings, retail spaces, offices, and multifamily housing. Similar to traditional stocks, the value of your shares can increase or decrease based on the performance of the company. REITs provide a convenient way to diversify your portfolio and gain exposure to various segments of the real estate market.

Real Estate Syndication

Real estate syndications provide an excellent opportunity to invest in large-scale real estate projects like multifamily rental properties and enjoy high yields even during inflationary periods. In this type of investment, individual investors pool their capital through a project sponsor who handles all aspects of the project, including property management and eventual sale. Investors can receive regular monthly income from rent collection and a potential cut of the profit at the time of sale. Syndications typically report a return of 15 to 20 percent for investors, but it’s essential to consider the holding time if liquidity is a concern. Some syndications have a short-term holding plan, while others advertise the same projected return over a more extended period of 5 to 8 years.

Final Thoughts

To safeguard your investments against the negative effects of inflation and retain their value, it’s essential to create a diversified portfolio of assets. The ongoing high-inflation era is a crucial reminder that inflation can strike anytime, emphasizing the importance of hedging your investments.

Onbridge Capital, a prominent real estate syndication firm, presents its investment partners with the chance to benefit from shares of multifamily rental properties and earn a passive monthly income.