1. Continue to invest in the stock market. Equity investing is an effective inflation hedge because the stock market tends to outpace inflation.
The stock market is a wonderful hedge against inflation for a few reasons. Since 1928, the U.S. stock market is up 9.8% per year while inflation has averaged 3% per year. So stocks have grown at nearly 7% more than the rate of inflation.
These investments do well historically against higher inflation, but that doesn't mean they leave you entirely immune to inflation price volatility.
Some of the most common types of safe assets historically include real estate property, cash, Treasury bills, money market funds, and U.S. Treasuries mutual funds. The safest assets are known as risk-free assets, such as sovereign debt instruments issued by governments of developed countries.
Investors may want to consider other asset classes that perform well during inflationary periods, including commodities, real estate, foreign exchange and commodity-linked equity investments. Real assets, with their value tied to underlying physical assets, have historically performed well in rising inflation.
An inflation hedge typically involves investing in an asset expected to maintain or increase its value over a specified period of time. That's why real estate is considered a hedge against inflation, since home values and rents typically increase during times of inflation.
Diversification is one of the most effective ways to hedge a portfolio over the long term. By holding uncorrelated assets as well as stocks in a portfolio, overall volatility is reduced. Alternative assets typically lose less value during a bear market, so a diversified portfolio will suffer lower average losses.
Gold does have a better inflation-hedging record when measured over periods much longer than five years. Much, much longer, in fact.
Inflation Proof Investments
Several asset classes perform well in inflationary environments. Tangible assets, like real estate and commodities, have historically been seen as inflation hedges. Some specialized securities can maintain a portfolio's buying power including certain sector stocks, inflation-indexed bonds, and securitized debt.
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