Protecting your wealth with assets: what is the best hedge against inflation?
If you’re reading this, you’re probably quite concerned about the economy and your ability to protect your wealth from inflation. You’re not alone; in the past 30 years, rising inflation rates have led to investors scrambling to find ways to protect their money from being eaten away by an ever-increasing cost of living. But what asset class provides the best hedge against inflation?
The Real Story
Inflation can have negative effects on a person’s savings and retirement. It can reduce the value of wages, reduce net worth by eroding away at both existing assets and future earnings, as well as driving up prices in marketplaces. Anyone who does not have an independent source of income must either withdraw their money from their investments or start earning more in order to keep pace with increasing prices; otherwise, they will be locked into a pattern of high consumption and limited savings.
A high-quality stock portfolio that includes domestic and international holdings may serve as a hedge against inflation for some investors who want to stay invested during a period of low interest rates such as this one.
Myths about gold
Gold can be used as a hedging asset. Gold is an intangible, finite resource, valued for its unique properties. There are three main ways gold can be useful as a hedging investment: It can act as an alternative currency, it can serve as protection from high inflation rates, and it can serve as a barometer of global risk aversion. However, many people buy gold thinking that it will keep their wealth from being affected by inflation.
* There are many myths about gold; one of these being that buying more than you need will help protect you from inflation. While this may work in some cases, in others it could cause more harm than good. Remember that in order to maintain liquidity and stability, you’ll have to keep selling off portions of your precious metals holdings when needed.
* Gold should not be seen as a universal hedging tool but rather one type of option for protecting your wealth. A better option would be to diversify across different types of investments (such as stocks) depending on how much money you want to invest and how much risk you’re willing to take on. You also might consider investing in other physical commodities such as silver or platinum. The best hedges against inflation are those that can grow alongside the economy without losing value over time. For example, if you own land or buildings they can’t lose value just because there’s less paper money in circulation.
Silver as a Hedge Against Inflation
Silver has been a strong, time-tested store of value and a hedge against inflation. Much like gold, silver protects you against rising prices. If the world enters a recession or depression where confidence in fiat currency plummets and inflation runs rampant, then all investments may be thrown into question as having any real value. The long history of silver’s use as money dates back over 5,000 years ago, as seen in ancient Greece and Asia Minor–indicating that this metal will not lose its value in times of economic uncertainty. In addition to being less volatile than stocks or bonds over the long term, it offers quick liquidity when compared to other metals such as gold. There are some storage costs associated with holding physical silver but they are small in comparison to potential benefits. And if there were ever a complete collapse of our monetary system and society reverted back to bartering for goods, silver would become an even more valuable commodity. It is no wonder that many investors have turned to precious metals such as silver as an inflation hedge
Stocks as an Asset During Inflation
Stock markets have been up and down, in and out of style, but more often than not stocks have been reliable (relatively) safe havens during periods of high inflation. The argument for this assertion has its roots in two safety nets built into stocks – dividends and buybacks. Dividends may seem like a detail but they play an important role. Consider a stock price at $100 and a dividend payout at 2% which equals $2 per share. Inflation occurs and now the new market value is $150. With a 4% rate of inflation ($6) per year, you would still get your 2% dividend at $3 per share on that new market value of $150.
In addition to paying dividends when profits rise or profits fall, companies can also buy back their own shares if they wish to reduce the number outstanding. As opposed to just paying out cash as dividends shareholders receive shares instead which are worth more as prices go up. All else being equal (including rates of return), every dollar that is paid out as a dividend or reinvested in buying back shares will be worth twice as much after 10 years if prices double each year than it would if prices only doubled every 10 years because it compounds over time.
Real Estate as an Asset During Inflation
Real estate can be a great asset to invest in during times of inflation. That’s because, in general, the price for real estate tends to rise when there’s high levels of inflation. For example, if one buys a home for $200k and there is 3% inflation (aka 10% annualized), that means that after 2 years the house will now cost $220k in today’s dollars. In other words, in 2 years that house just appreciated $20k or 10%. But if one bought an index fund portfolio without thinking about these exact numbers, one would only have made 3% compounded interest per year on their money. So buying real estate as an investment can protect your purchasing power from the erosion of inflation. It’s also important to note that the appreciation rates vary from city to city, so this isn’t true for every market out there. In most markets, over time homes tend to appreciate faster than inflation (a higher rate). For example, if you buy a home for $200k at 4% inflation and keep it for 20 years, then you’ll see the value increase by over 100%, which is much better than any return you could get from stocks. Another advantage of owning property is that some lenders may allow you to borrow up to 75% of the value of your property – more than most banks are willing to lend on stocks! If you’re looking for a way to diversify your portfolio during times of inflation, consider investing in real estate – especially since housing prices are historically quite resilient in down markets too.
Interest rates are at all-time lows and, with record low bond yields, investing in traditional assets may not be a good idea for individuals. Even gold is up about 33% over the last two years – still not an investment that delivers good returns. The only way to really safeguard yourself from inflationary periods is to invest in real estate, which has an average annualized return of 8% over 30 years; has relatively predictable value; and generates cash flow to offset any short-term drop in prices. Why do you think condos can’t be rented below $250 per month? Because they have value long-term even if it takes time to catch up. It’s always better to rent than buy because renting is easier and offers more flexibility when it comes to job changes or other life events.
Leave a Reply