The general level of prices for goods and services rises as the value of a currency falls—a process known as inflation. Employing certain strategies can shield against the expected decline in a currency’s worth, thereby preserving purchasing power.

An investment’s value can also be safeguarded through inflation hedging. Some investments might appear to offer satisfactory returns, but the impact of inflation could mean they sell at a loss.

During inflationary times, nurturing asset classes that surpass market performance is a strategy for the prudent investor. Traditional bonds are favored by income-seekers, yet they are just one of many revenue-generating investments.

To shield yourself from inflation, consider these top five asset classes. From equities to alternative investments, to debt instruments, these options cater to individuals with varying risk appetites.

Their ability to outperform the market makes asset classes a smart acquisition for an astute investor. One tactic includes redirecting funds from bonds to stocks, particularly preferred shares. In inflationary conditions, real estate often yields positive results, with REITs being a practical investment route. Incorporating international stocks or bonds into your portfolio is another way to brace against domestic inflation patterns. More exotic debt instruments like TIPS—Treasury Inflation-Protected Securities—also present an alternative. Buying senior secured bank loans can provide higher returns while safeguarding against rate hikes.

Inflation’s return usually spells trouble for bonds but can revitalize the stock market. This trend could be advantageous by reallocating 10% of your portfolio from bonds to equities.

Considered a safe and conservative mix, a 60/40 allocation of stocks and bonds provides balance. An illustrative example is the Dimensional DFA Global Allocation 60/40 Portfolio (I) (DGSIX).

Note

While a 60/40 stock/bond investment strategy offers a hedge against inflation, it might fall short in the long run compared to portfolios with a higher stock percentage due to compounding interest. You could miss out on returns compared to more stock-intensive portfolios.

Higher yields may be found by investing in certain securities, offering resilience against price declines that often accompany inflation.

Utility stocks emerge as a third option, with their prices adjusting predictably in sync with the economic cycle, paying stable dividends.

American investors sometimes overlook opportunities in international stocks. If your portfolio includes S&P 500 index funds, consider supplementing it with an international index fund.

Investing in real estate offers numerous benefits. Its intrinsic value and steady income from dividends act as a hedge against inflation. As property values and rent prices increase with inflation, real estate remains in demand, providing a reliable financial buffer.

Real estate, as a tangible asset, lacks liquidity. Another option to explore is.

Fast Fact

Novice investors should consider obtaining these intricate investments via mutual funds or ETFs. For example, the Vanguard Global Ex-U.S. Real Estate Index (VNQI) offers extensive exposure to global properties, while the iShares TIPS Bond ETF (TIP) tracks U.S. inflation-protected bonds’ performance. The Lord Abbett Floating Rate Fund (LFRAX) is a suitable option for those seeking exposure to lower-grade corporate loans.

TIPS, a variety of U.S. Treasury bonds, are crafted to appreciate in tandem with inflation, backed by the U.S. government, making them among the world’s safest investments.

These bonds are linked to the Consumer Price Index, with their principal adjusted accordingly. Interest is paid biannually at a fixed rate on the adjusted principal. The principal ascends with inflation and descends with deflation, available in 5-, 10-, and 30-year maturities.

TIPS do entail risks, reacting to shifts in prevailing interest rates. Premature selling might result in financial loss.

Certain companies flourish when inflation pushes prices higher. Banks benefit as interest rates climb, banking on increased loan prices.

Research by Duke University’s Campbell Harvey and Claude Erb indicates that gold excels as a long-term (century-scale) inflation hedge. Conversely, many analysts argue equities are more effective on an annual basis.

Gold, as a tangible asset, holds its worth amidst rampant inflation as currencies like the dollar lose purchasing power. Though gold often appreciates when inflation rises, it’s not a flawless hedge. Other factors can sway its prices, causing significant year-to-year fluctuations, impacting inflation-adjusted returns as well. Gold’s variation in nominal and real returns hasn’t been tied to actual inflation over recent decades.

Bitcoin, theoretically, could be a robust inflation hedge, viewed as a safe haven like precious metals and real estate, which counteract financial asset devaluation. Bitcoin’s limited history provides limited insights. Since its inception in 2009, it hasn’t faced substantial inflation challenges. Its erratic behavior raises questions about its resilience to inflation. Post-COVID inflation saw Bitcoin’s value soar, peaking in early 2021, then plummeting as inflation persisted. In 2022, rising inflation and interest rates led to Bitcoin’s sharp drop, but by 2023, with easing inflation, its value ascended. In 2024, Bitcoin reached $90,000 by November as inflation continued to stabilize.

Real estate serves as a lasting inflation defense. It’s a tangible asset, preserving value during inflationary periods, unlike paper assets. Rising prices boost property values, increasing rental potential for landlords.

Loan payments effectively decrease due to “depreciating debt,” where a mortgage’s nominal payment remains constant but its real value decreases over time. This makes real estate a compelling choice during inflationary times.

Inflation is an ever-present risk in the investment world. It fluctuates with economic events, eroding money’s value over time.

Investors have numerous options to counter inflation, from dedicated asset classes to strategic investments. Monitoring and acquiring these assets during inflationary periods can enhance portfolio performance despite economic instability.