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Extreme inflationary conditions can make investing confusing, unpredictable, and risky. Because of this, some investors prepare for potential inflation by specifically allocating a portion of their portfolio to inflation-resistant assets.
Investors that choose to try and protect their assets, otherwise known as “hedging” against inflation, are doing so to mitigate risk as much as possible.
This article gives a basic introduction to common methods of hedging against inflation for long term portfolio stability.
Are Stocks a Good Investment During Inflation?
Stocks are generally considered inflation resistant assets. However, there are many different types of stocks, and some perform better than others during inflationary times.
Value stocks are stocks bought in a company that is either fairly valued, or slightly undervalued, and these stocks provide current cash flow.
- Because they are also already considered a “value” deal on a company stock, they tend to at least hold that initial discounted or fair value even during recessionary times.
Blue Chip Stocks
Blue chip stocks are stocks in a large company with a good reputation.
- Blue chip stocks are sometimes considered indicators of the economy, and can represent many different industries. Therefore, many of these companies have pricing power that can keep up with inflation. In theory, this should help these stock prices stay relatively stable in relation to the inflation rate.
Are Bonds a Good Investment During Inflation?
Hedging inflation with bonds is yet another investment strategy that may have some merit, but only if you invest in the right type of bond.
Floating Rate Notes
Floating rate notes are a type of bond with an interest rate that floats along with inflation.
- Because the interest rate is not fixed, investors can expect their floating rate note bonds to readjust along with federal fund rates rather than staying stagnant.
Series I Savings Bonds
I Bonds, or inflation bonds, are bonds that have both a fixed interest rate and a variable rate based on semi-annual inflation rates.
- These bonds have a “base rate” and a “variable rate.” The base rate stays the same throughout the lifetime of the bond while the variable rate will change periodically depending on inflation, interest rates, etc.
TIPS (Treasury Inflation-Protected Securities)
TIPS, or Treasury Inflation-Protected Securities, are U.S. Treasury bonds that tend to hold a value that tracks with inflation.
- During inflation, TIPS will “readjust” their value (principal amount) to maintain the same rate of appreciation throughout inflationary periods.
Is Gold a Good Investment During Inflation?
Gold is a commodity that has historically been considered a solid long-term hedge against inflation. Unlike banknotes or cryptocurrencies, gold holds real, tangible value and is in limited supply. This asset class generally tracks well with inflation.
- From 1973 to 1979, a period of high inflation in the U.S., gold value tracked at an impressive 35% annualized return.
Over a long period of time, gold may outperform many other asset classes. However, there are many other economic and market factors that may drive gold’s value, and these factors are wildly unpredictable, so as a short term hedge, gold may or may not be a good investment.
Are Commodities a Good Investment During Inflation?
Commodities are historically one of the best hedges against inflation that an investor can include in their portfolio. This is in part because commodities are a basic good that society needs to function.
- Commodity prices rise when inflation is accelerating, which in turn offers protection from some of the effects of inflation.
Commodities have very little correlation with stocks and bonds, and because of this they can be used to not only hedge inflation, but also diversify the investor’s portfolio.
Is Farmland a Good Investment During Inflation?
Farmland is an asset class that has consistently proven to be more stable than even some of the most trusted assets, such as gold. However, it has been overlooked in lieu of general real estate. Why? Because it is an asset class that some may not entirely understand.
Farmland is a hard asset that has historically produced consistently positive returns with lower volatility and a strong correlation to inflation. This asset class tends to have attractive yields even during recessionary times.
Farmland’s performance during inflationary times has been consistently positive. Here is what we know:
- Farmland assets tend to appreciate over time while also providing annual returns on cash rent.
- Because most cash rents are paid upfront or biannually, and they have exceptionally low vacancy rates, farmland can provide shield against uncertainty.
- Farmland produces commodities. Since commodities tend to rise in price as inflation increases, farmland correlates well as a producer of such commodities. In other words, as commodity prices rise, so do farmland prices.
- Commodity food prices are more sensitive to inflation than any other type of good. Barring higher input prices, increased commodity prices have the potential to lead to larger profits for farmers. More profitable land is generally indicative of higher rental and land prices.
- Farmland values are regionally specific and highly related to the inherent properties of the land itself, so thorough due diligence and industry expertise can go much further in shielding farmland investments from risk than many other asset types.
Investing will always carry some level of risk, but through rigorous research and due diligence, investors may have the ability to minimize that inherent risk.
Inflation is a natural market occurrence, and it is important that investors seek out inflation resistant asset classes to mitigate this risk. Create your AcreTrader account today to see diversified farm offerings and start building a portfolio of farmland assets.