These 3 area can be used to hedge inflation
There has been a lot of talk over the past year about inflation and how that might affect the price of stocks, the price of goods and services and the value of the US Dollar. Inflation, by definition, is a general increase in prices and fall in the purchasing value of money. Throughout this past year we have seen trillions of dollars printed and put into circulation. In addition to the fiscal stimulus, improving pandemic conditions, private sector liquidity ad pent-up consumer demand could also spur more inflation. This has led many to believe the US dollar will start to lose its value due to a finite number of assets to use our dollars on. These dynamics could also drive-up long-term interest rates. With inflation happening all around us and vast shortages of supplies, where is a good place to invest your money today? Here are 3 areas to look at investing during a period of inflation.
- Real Estate
During times of inflation real estate values tend to increase with inflation. In addition to the values of real estate appreciating so does the amount landlords can charge in rent. Both value and the rent tend to outpace inflation. Unlike bonds that offer fixed cash flows, yields from real estate can rise over time. Real estate assets that have longer duration leases can include rent escalators to mitigate inflationary risks. Supply has remained in check for real estate even with high demand industries like industrials. The cost of land, supplies and labor will more likely reduce a surge in supply for real estate. When investing in private real estate, this typically makes sense for long term investors that are willing to deal with a lack of liquidity for these investments. There are several ways to invest in real estate including: direct ownership, private equity funds and publicly traded REITS. Real estate offer unique tax benefits and these benefits can be passed on to investors. Lastly, an additional benefit to real estate is diversification. Real estate tends to perform differently from stocks, bonds and commodities and this diversification can help to add to long term performance.
This chart from a recent Blackstone article shows the values of U.S. Private real estate during periods of rising interest rates.
2. S&P 500
Over the long term stocks offer more upside potential than bonds. The Standard and Poors 500 index tracks the stock price of the 500 largest companies within the United States. During periods of high inflation some companies are impacted by their costs of goods rising and this may negatively impact their stock prices. However, companies that pay a good divided can offset drops in purchasing price with the yield the dividend provides. Also, a rise in interest rates has a positive impact on value companies with large cash amounts on their balance sheets.
Treasury inflation protected securities are the 3 asset class to look at investing in during periods of inflation. TIPS are a U.S. Treasury bond whose price is indexed to inflation. The purpose of these investments is to explicitly protect investors from inflation. The principal value of TIPS is fluctuates based off the inflation rate. TIPS are designed for conservative investors that are looking to protect the purchasing power of their money. These investments are not designed for growth and historically provide a lower overall return than other bonds. Pictured are two examples of TIPS ETF’s that you can look to invest in via: https://www.investopedia.com/articles/investing/081315/9-top-assets-protection-against-inflation.asp