Hedging Against Inflation
Inflation. It’s inescapable. The current surge (6.2% as of October) can be partly blamed on pandemic shock, but a brief look at history shows that inflation is nothing new. In fact, the U.S. has dealt with seven episodes since World War II.
The real question then, is how to deal with it. The traditional view is that higher inflation is bad for stocks as it increases the cost of borrowing, jacks up input costs, and pings the standard of living. But that’s a somewhat simplistic view. Certain sectors underperform during high inflation, but others do better. Certain assets are more susceptible to inflation than others. The point is, there’s no black-and-white, always-true adage we can apply here. So, what can we as investors and business owners do to hedge against the effects of inflation?
First, take a close look at real assets. Real assets—that is, assets that have an intrinsic worth—may not be impacted as deeply by inflation. Examples include things like real estate & land, gold, silver, equipment, and other tangibles.
Now let’s talk about liquidity. It’s important to keep a proper balance between immediate liquidity, and liquidity for tomorrow. The “correct” balance is unique from person to person—how much will your business need in the next month? The next year?
Certain things will always need to stay in cash, like payroll. But with cash that you won’t need for a while, you may be able to protect today’s purchasing power by diversifying. Real estate investment trusts (REITs) are an option. Gold is an option. They may provide greater diversification and potentially lower overall risk in an “inflation situation,” making them a counterbalance to the rest of your portfolio. There are plenty of options—the best one for you, like any investment, depends on your unique needs, goals, situation, and risk tolerance.
Inflation is nothing to get hyped up about. It’s simply another unavoidable reality. But we can prepare for it and minimize the impact of inflation on your long-term financial plans with a strong investment strategy in place.
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