Money loses a small part of its value every day due to inflation. Inflation is a normal phenomenon in the economy, and I have already written about how it affects our money. In this article, you will learn the best ways to hedge against inflation in 2021.
When inflation increases, purchasing power declines, and each dollar can buy fewer goods and services. You may have noticed the rise in inflation in the US economy. There has been a rise in utility prices, medical care, housing and shelter (which includes housing and rent prices),
According to the projection of Statista, inflation in the US will be higher than 2,2% in the coming years. That’s a good enough reason to find a way for preserving the value of your money.
Not to lengthen, here are the best ways to hedge against inflation in 2021.
Buy More Stocks
One of the best ways to hedge against inflation in 2021 is to invest a bigger portion of your portfolio in stocks. The reason for this is that corporate earnings and profits need to increase with inflation. Businesses have to pay higher costs due to rising prices of inputs and these higher costs spill over to the consumers.
Stocks are the best long-term solution to hedge against inflation. Although stocks can be quite volatile in inflationary periods, if you are investing in the long term, you should overcome such periods. Therefore, if you consider investing on a horizon of 20 or more years this might be a good option for you.
Also, especially for the period of inflation, it would be good to look at companies dealing in commodities. As commodity prices generally rise, so the revenues of these companies will increase. As a result, your return on investment will dampen inflation and perhaps even further increase your return on investment.
If you consider stocks a good option to hedge against inflation learn how to invest in the stock market and choose stocks that suit your investment strategy. You can also diversify your investment and invest in ETFs. Some ETFs that might be a good option for you are:
- Vanguard Mid-Cap ETF (VO)
- Vanguard S&P 500 ETF (VOO)
- iShares MSCI KLD 400 Social ETF (DSI)
- iShares Core MSCI World UCITS ETF USD (EUNL)
The commodity is a raw material that is bought and sold, such as gold, coffee, oil, grains, etc.
Inflation is measured by the CPI and the major groups represented in this index are housing, transportation, education, communication, medical care, food & beverages, and other goods and services.
Commodities are a direct input for most of these groups. For example, transportation is dependent on oil prices, while food is dependent on the prices of agricultural commodities. The production which is dependent on industrial metals also influences inflation.
How to invest in commodities
- Buy physical commodity
- Buy commodity mutual funds or exchange-traded funds (ETFs)
- Trade commodity options or futures contracts
- Invest in stocks in the commodity industry
The simplest way might be to buy a commodity ETF. There is no hassle around insurance or insurance as with physical gold and you can sell it for a moment during the trading day.
If you aren’t interested in investing in commodities, you can consider investing in only gold. Gold is wide-known as a hedge against inflation.
Many investors buy gold when they are afraid their currency will lose value. Gold is a physical asset that tends to hold its value. Moreover, the price of gold increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline.
This happens because first fiat currency loses purchasing power to inflation. Secondly, gold tends to be priced in those currency units. Thirdly, gold tends to rise along with everything else.
Moreover, gold is seen as a good store of value so people may be encouraged to buy gold when they believe that their local currency is losing value.
However, an asset like gold doesn’t pay a yield. Therefore, when interest rates rise, you might consider different asset classes for better returns.
How to buy gold
If you decide to buy gold, you can do it in several ways:
- Buy physical gold (in form of bars, coins, or jewelry)
- Buy gold mutual funds or exchange-traded funds (ETFs)
- Trade gold options or futures contracts
- Invest in stocks in the gold industry
As with commodities, the easiest way might be to buy a gold ETF. There are no insurance or security hassles like there is with physical gold and you can sell at a moment’s notice during the trading day. Some of the ETFs that you can consider are:
Real Estate Investment Trusts (REIT)
Real estate investment trusts consist of companies that own a pool of real estate that pays out dividends to their investors. In general, property prices and rental income rise when inflation rises. These income-generating investments can offer higher returns without compromising investment risk.
REIT ETFs can be an affordable and low-risk strategy for investors who want to diversify their holdings without the hassle of owning actual properties. For example, you can choose Vanguard Real Estate ETF (VNQ) and invest in 180 different equity REITs that add diversification to your portfolio.
Also, some of the better REIT ETFs you can consider are:
- SPDR DJ Wilshire Global Real Estate ETF (RWO)
- iShares U.S. Real Estate ETF (IYR)
- Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
- Schwab U.S. REIT ETF (SCHH)
Buying a Real Estate
If you have a larger amount of money ready to invest, one of the best ways to hedge against inflation in 2021 might be to buy real estate. When you own real estate, you can protect yourself from inflation in two ways.
The first way is renting, and by increasing inflation, you will be able to increase the rent, which will actually pass the inflation on to the tenants.
Another way is to preserve the value of money by owning real estate. When prices go up, so does the price of your property and you will be able to get more money for it.
Treasury Inflation-Protected Securities (TIPS)
The last of the best ways to hedge against inflation in 2021 is investing in TIPS. As the name says, these are securities that protect investors from inflation.
We all know bonds are not a good choice to hedge against inflation. The reason is that a bond pays a fixed rate of interest till its maturity. On the other hand, their price can change. However, during low-interest rates (a period in which we are now), their price can only go down, since the interest rates can’t go any lower.
This is where TIPS comes to help investors. TIPS are bonds whose interest rate is indexed to the inflation rate. That means that you will receive higher interest payments when inflation rises, but also less if deflation occurs.
TIPS are low-risk investments because they are backed up by the US government. They usually come in three maturities: 5-year, 10-year, and 30-year.
How to buy TIPS
You can buy TIPS in these ways:
- Directly from the US Treasury
- On the secondary market
- Through mutual funds and exchange-traded funds (ETFs)
If you decide to buy TIPS via ETF, you can take a look at the ETF database of TIPS which you can find searching.
Many consider investing in Bitcoin as a kind of protection against inflation. Therefore, when diversifying a portfolio, you should consider that option as well.
Bitcoin’s supply has a limit of 21 million that can be mined in total. When this quantity is successfully extracted, it will no longer be possible to mine according to current standards.
Unlike money, it cannot be devalued by the government or the central bank that distributes it too much. This is the reason why Bitcoin is considered a good investment against inflation.
The problem is that Bitcoin does not have a long history to determine if all this is just speculation or is it really good in periods of inflation.
Additionally, Bitcoin’s value is based entirely on other people’s willingness to hold it. Bitcoin isn’t tied to any other asset, such as gold. Many investors consider Bitcoin as a better hedge against inflation than gold.
Read more about Bitcoin itself and how you can buy it in a beginner’s guide to Bitcoin.
You can also hedge against inflation using collectible items. Collectible items are rare and/or popular. Its value depends on availability, demand, and condition. The value of these assets should increase with rising inflation.
Some of the collectible items that you can consider are:
- Antique Furniture
- Comic Books
- Coins and currency
- Trading cards
- Classic cars
Each of these categories has its advantages and disadvantages. You should consider investing in categories in which you have the most knowledge.
NFT As Hedge Against Inflation in 2021
Non-fungible tokens or NFTs have become very popular in the last few months. There were large transaction amounts where the purchase of several NFTs was made which resonated with the world. It is perfectly clear that investments that allow people to make quick money also attract more attention.
In addition to serving a quick buck for some, this asset class could be one of the ways to hedge against inflation in 2021.
NFTs are actually modern art. It is more efficient and more liquid than the traditional one. Fees for buying these are also lower than when buying traditional art.
So, you can bet that NFTs will succeed, thus gaining protection against inflation and a huge appreciation of your portfolio. However, you should be careful if this is a matter of brief enthusiasm. What NFT will be in the future only time will tell, but what we can say with certainty is that the world has begun to go in that direction.
If you want to know more about NFT, read what is an NFT and how to buy it.
Invest in Yourself – Human Capital
Human capital is an intangible asset. It is a set of skills, knowledge, habits, personality, and other qualities found in every human being. All of these characteristics are embodied in the ability to perform work so as to produce economic value. This could be the best way to hedge against inflation in 2021.
The more you invest in yourself you will be able to serve more people and work more efficiently which will increase your earning potential. Provide more value to the world and you shall receive more value. The best thing is that no one can take it away from you and you have control over the outcome of this investment.
Depending on your goals, you can work on areas that are weaker to you, and you can work on stronger areas to further strengthen them. For example, skills people commonly practice for personal growth are:
- Time management
- Work ethic
- Technical skills
- People skills
- Mental wellbeing and attitude
Keep in mind that human capital, in addition to helping you earn more and thus fighting inflation, will also help you in other segments of life.
Conclusion on Best Ways To Hedge Against Inflation in 2021
Inflation is a normal occurrence in any economy. If you want to protect our wealth, you need to learn ways to “defend” yourself against inflation.
Normal inflation is around 2%, but in the future, this figure could be slightly higher given the expansionary monetary policy of central banks around the world. This puts even more pressure on investors to take anti-inflation measures.
To summarize ways to protect against inflation are as follows:
- Buying more stocks
- Investing in commodities
- Buying gold
- Real estate investment trusts (REIT)
- Buying a real estate
- Treasury inflation-protected securities (TIPS)
- Collectible Items
- Human Capital
Each of these investments provides a unique way to protect against inflation. Which one is best for you, decide for yourself taking into account the good and bad of each.
It is important to have a well-diversified portfolio to help you defend against inflation. I hope this gave you an impression of what asset classes are currently available in 2021. If you got the value from this article, please share it further.