How To Hedge Against Inflation: 8 Inflation-Resistant Assets

Inflation, as you know, is the general rise in prices that could inevitable reduce your purchasing power. For investors, inflation risk can take a sizeable chunk out of their potential returns. 

Wondering how to hedge against inflation? 

There are certain inflation-resistant assets that not only reduce the effects of inflation on your portfolio but can help improve your returns during times of economic uncertainty. Collectibles like wine, for instance! 

In this article, we’ll cover how hedging against inflation works, 8 ways to help protect against inflation (including wine), and how Vinovest makes it easy to add this inflation-resistant investment to your portfolio.

How Does Hedging Against Inflation Work?

Inflation reduces the overall returns your investments provide. For example, if you have an asset increasing in value by 5% a year, but inflation is 3%, the real return of that asset is 2%. 

The United States Federal Reserve generally tries to keep a long-term average inflation rate of 2%, but there can be fluctuations in the short term. 

If you’re wondering how to hedge against inflation, it simply means to take steps to offset the effects of rising prices on your investments. 

When looking to protect your investments during high inflation, a good option is to purchase non-cyclical assets. These investments are more likely to remain stable during a high inflationary period. 

Let’s look at some investments with a history of performing well during high inflation.

8 Ways To Protect Against Inflation

Here are 8 possible investments that can help minimize the effects of inflation on your portfolio. 

1. Wine

When looking for an investment to hedge against inflation, wine might not be the first asset to come to mind. 

However, wine is a remarkably inflation-resistant investment. For example, when the Covid-19 pandemic was in full swing in 2020, fine wine’s downturn was shorter and less severe than most mainstream assets. 

At its lowest in March 2020, the Liv-ex 1000, one of the broadest fine wine indices, declined by just 4%, while most equity markets suffered double-digit losses. 

Further, wine has outperformed the International Monetary Fund’s (IMF) worldwide CPI inflation over the long term. Wine has also beaten the stock market, precious metals, and art throughout the last 100 years. 

Wondering what the best way to invest in wine is? 

For those looking to add this inflation and recession-resistant asset to their portfolios, Vinovest is a wine investment company that lets you buy, store, and sell sought-after wines that historically outperform the market. 

How Vinovest works: 

Step 1:Sign up with the platform - all you need is an email address, name, and password. 

Step 2: Answer a few questions to help Vinovest’s wine experts determine your investment style: conservative, balanced, or aggressive. 

Step 3: Fund your account. You need a minimum of $1,000. 

Step 4: Using the answers in the questionnaire, Vinovest’s AI will recommend investments for you. Simply click on the wines to see more about them. 

Step 5: Watch your portfolio grow. 

If you prefer whiskey, the good news is that it’s also an inflation-resistant investment. For example, 8-year old whiskey bought new and sold between 2011 and 2020 has provided average annual returns of 15.4%. 

2. Treasury inflation protected securities

Treasury inflation protected securities (TIPS) are US Treasury bonds designed to increase value to keep up with rising inflation. Additionally, because the US government backs them, they’re considered among the safest investments available. 

The bonds are linked to the Consumer Price Index, and their principal amount adjusts according to this index. CPI, or Consumer Price Index, measures the differences in costs overtime paid by consumers for goods and services. 

TIPS pay interest twice a year at a fixed rate and is available in three maturities: 5-year, 10-year, and 30-year. 

However, TIPS aren’t without risks. They’re sensitive to current interest rate changes, so if selling before the bond reaches maturity, they may lose money. 

Similar to TIPS, there are inflation-linked bonds or I bonds. These are fixed income investments. However, unlike nominal bonds, I bonds are tied to the US CPI inflation. As inflation rises, so does the outstanding principal of the bond, increasing the bond's value. However, like TIPS, I bonds are susceptible to interest rates. 

3. Gold

Investors have long viewed gold as a store of value during rising inflation because it’s generally succeeded at being a good hedge. Gold also shares a negative correlation with interest rates. 

Although it’s important to note that there have been periods where inflation has beaten gold. For example, between 1980 and 1984, gold lost 8.3% a year while inflation averaged 7.5% a year.

There are several ways to buy gold. One is through an ETF, so you don’t have to hold and protect the gold yourself. Plus, there are options with ETFs; you could invest in physical gold or the stocks of gold miners. You could also invest in a precious metal mutual fund and gain exposure to several precious metals. 

Buying gold coins is another option. The Chinese Panda, Canadian Maple Leaf, South African Krugerrand, and American Eagle are some of the top gold coins available. 

4. Real estate

This asset class has done well during times of higher inflation expectations as property values increase. This means landlords can charge more for rent. 

Buying a property outright is the most obvious real estate investment. The benefit of owning your own home is immunity from rising rent prices. Alternatively, real estate investment trusts (REITs) offer an affordable way of benefiting from real estate. 

REITs allow investors to pool money and distribute the funds across a range of income-producing commercial real estate. There are also residential REITs specializing in managing and constructing houses and apartment buildings. 

REITs have drawbacks, however. They are subject to property taxes, making up as much as 25% of the total operating expenses. Additionally, since REITs often rely on debt more than other investment classes, they can be sensitive to rising interest rates. This is because rising interest rates increase the cost of debt.

It’s also important to consider how the Covid-19 pandemic has affected the real estate landscape. Commercial real estate is still in limbo as demand for commercial real estate, like offices and retail spaces, remains low as businesses adopt remote working or hybrid models. 

Similar to REITs, there are also real estate funds. A real estate mutual fund primarily invests in REITs and real estate operating companies, though some may invest directly in property. 

5. Stocks

While the stock market may experience short-term price fluctuations, it remains an excellent long-term vehicle for hedging against unexpected inflation. However, not all stocks are equally resistant. Look for companies with good purchasing power to carry their rising costs over to customers. 

A financial advisor would recommend a 60/40 stock/bond portfolio. As investment advice, this structure offers an effective inflation hedge. However, during high inflationary times, the bond market usually suffers the most. 

In fact, long-term inflation can annihilate long-dated bonds. If the inflation level rises above the bond’s interest rate, your purchasing power reduces over time. A long-dated bond’s price will reduce to compensate for this. So, the longer the bond’s maturity, the more sensitive it is to inflation. 

A stock advisor might suggest reallocating 10% of your portfolio from bonds to equities during these times. 

Value stocks are also worth considering. Value stocks refer to a company's shares that seem to be trading at a lower price relative to its fundamentals, like dividends and earnings. This makes them particularly attractive to investors, partially because they perform better during a high inflationary period. 

6. Commodities

Commodities refer to a broad category, including grain, precious metals, electricity, oil, natural gas, foreign currencies, etc. Commodity prices tend to have a unique relationship with inflation: as commodity prices rise, so do the prices of the products made from that commodity. Commodities like oil and precious metals also tend to perform well during low inflation. 

While investing directly into specific commodities like oil is possible, investing in a broader range of commodities through ETFs is also a good inflation hedge. The iShares S&P GSCI Commodity Indexed Trust (GSG) might be worth looking into. 

Before investing, it’s important to note that commodities are volatile and require a high level of caution. Commodities are heavily dependent on supply and demand factors, so even a slight change in the supply from geopolitical tension or conflict can dramatically affect the price. 

7. Leveraged loans

A leveraged loan is a loan made to a company that already has high debt levels, a poor credit score, or both. As expected, these loans carry a high level of risk and include more fees for the borrower since there’s a much greater chance of default. 

Leveraged loans are an asset class typically referred to as collateralized loan obligations (CLOs). They’re essentially a group of loans pooled into one security. Investors then receive scheduled payments. 

For the lender, leveraged loans can provide a high rate of return, making them particularly profitable. However, there’s a higher chance the borrower defaults, meaning the loan is at risk of not being repaid. 

These investments are attractive during high inflationary times because they offer a variable inflation rate, making them a good hedge against inflation. As with every investment, leveraged loans carry risk. 

Aside from the credit default risk, leveraged loans are relatively illiquid and have fewer boundaries protecting lenders. This could expose the fund to greater losses if the borrower defaults. 

8. International assets

US investors are inclined to buy US stocks and bonds. However, diversifying internationally can improve your portfolio's long-term performance and serve as a solid hedge against higher inflation. 

Several large economies don’t fluctuate in sync with the US market. Adding stocks from countries like Italy, Australia, and South Korea can help hedge your investment against local market fluctuations. By buying bonds from foreign issuers, you gain fixed income exposure that can remain stable even if inflation rises at home. 

Additionally, some international markets, particularly emerging markets, offer the potential for strong growth. 

If looking to capitalize on this investment, a mutual fund or ETF would be two of the most accessible easiest avenues.

Fine Wine: A Fantastic Hedge Against Inflation

Don’t be caught out by unexpected inflation. Having a few inflation-resistant assets is a part of good portfolio management. They can minimize the inflation risk and help you achieve your long-term investment goals. 

There are plenty of inflation-resistant assets to choose from, but fine wine remains a remarkably stable investment, providing consistent returns year after year. 

Simply sign up with Vinovest to add this inflation-beating asset to your portfolio.