Hedging strategies: Five ways investors can stave off inflation jitters

Summary

  • Rising inflation can have a negative impact on the rate of return on investments.
  • Hike in interest rates can also push down bond prices due to inflation.
  • However, proper planning and smart foresight can help to a large extent in protecting investments.

Rising inflation can easily raise stock market investors’ eyebrows since it has a negative impact on the rate of return on investments. Bond investors also look to shift to equities in a scenario where the central bank is planning to raise interest rates to counter rising consumer prices.

Hike in interest rates can push down bond prices due to inflation. A rise in both interest rate and yields implies a falling price and a lower principal value for the fixed-income investment.

However, proper planning and smart foresight can help to a large extent in protecting investments. Investors can consider investments that can offer higher returns than the existing rate of inflation.

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Five tips to hedge against inflation:

A smart investor is the one who invests in asset classes that could outperform the market during inflationary times. Such investments can range from bonds to equities to alternative investments.

But investors are advised to conduct thorough research before making any decision, as sinusoidal market trends are evident.

Shift to equities

According to several experts, investors should shift to stocks during inflationary scenario since these are generally known to beat inflation. There are some sector experts who suggest shifting 10 per cent of the investment portfolio to stocks from debt. Surging prices can result in more profit for companies, resulting in rise in share prices.

Technology and other growth stocks can be robust hedges against inflation. Consumer goods companies could also be considered as other good options.

Diversification helps

Different economies react differently to a particular given economic situation. While US stock indices may react negatively to a given scenario, the Australian and Chinese markets may react positively to the same. Thus, investors can add stocks from different markets to hedge their portfolio. Even bonds from foreign issuers could help.

 

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Real estate

Real estate is an appreciation-oriented asset which can be a good hedge against inflation. Investors can also get exposure to commercial, residential, and industrial properties through real estate investment trusts (REITs).

REITs offer income through rents and leases. They pay higher yields than bonds.

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Commodities offer outsized returns

During inflationary times, commodities give outsized returns.  Other than gold (already discussed), popular inflation hedges include energy commodities, such as oil and gas. Commodities, generally, have an intrinsic value unlike dollar or other currencies.

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Alternative investments

You can try out cryptocurrencies during inflationary times since they have limited supply. However, since cryptocurrencies such as Bitcoin are relatively new, it is unclear how they will fare during inflation.

Investors can also try certain bonds such as Treasury inflation-protected securities (TIPS), which are designed to increase in value to keep pace with inflation.

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