June 13, 2024

Check the top assets for an Inflation Hedge

Check the top assets for an Inflation Hedge

The present fiscal policies are making way for a steady rise in Inflation. Here is a list of assets proven useful as an inflation hedge.

What is meant by Inflation?

Generally, on adding more currency to the money supply, the purchasing power goes down, called Inflation. In the previous century, the decimation of the United States’ purchasing power has been noticed since the US adopted the Modern Monetary fiscal policy.

There is a reduction in the value of the rest of the dollars because the Federal Reserve prints more money to respond to the economic crisis. Therefore, Inflation is the reality of life, and in Stephen Covey’s words: Inflation is “out of our circle of control”. To increase our wealth and avoid the decrease in value, it is essential for us to focus on assets holding their purchasing power alongside consistently producing yields such that it exceeds the inflation rate.

Consumer Price Index

The principal method of tracking US dollar inflation is via the Consumer Price Index (CPI). This CPI talks about the purchasing power of the US dollar throughout time. Moreover, the purchasing power of the dollar declines with increasing index.

The inflation rate is about 2% over the previous decade, which means that the dollar loses almost 2% annually. Compound that throughout your career, and that is the reason why leaving money in a savings account has no benefits.

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Hedging against Inflation

A real yield alongside a store value is the two things you require to protect against Inflation. At the absolute minimum, however, a store of value must hold its purchasing power over time. This implies its worth doesn’t gradually decay with time. Another reward is the capacity to make an income. While an asset holds its value (or increases in value such that it is economically rational and reasonably predictable) alongside creating income over time, you are witnessing the best of inflation hedges around.

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As per the investor letter in May 2020, here’s a list of traits to measure probable inflation hedges:

  • Purchasing Power
  • Liquidity
  • Portability

Inflation in the future

The pandemic has caused economic fallout, and the Federal Reserve has pulled out all the stops in response. The Federal Reserve gets its securities from Open Market Operations, adding more liquidity to financial markets alongside expanding the money supply. Moreover, the Fed revealed that the interest rates would remain towards zero until 2021, ensuring a risk asset yield. Furthermore, stores of value like gold will be replaced by cash, making it more attractive for investors.

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The top inflation hedges include:

  • Real estate: Real estate has proved to be a reliable store of value alongside having appreciation potential, which is likely, relatively high if you purchase correctly. Moreover, it serves as a great store of value and has the added advantage of income.
  • US equities: Since the Fed rates remaining near zero until 2021, investors are urged to buy risky assets such as stocks instead of safety trades like AAA corporate bonds and government bonds, for a better yield.
  • TIPS- Treasury Inflation-Protected Securities: These government bonds protect against rising inflation. Traditional bonds do not offer security, while TIPS have a fixed yield. Irrespective of the inflation rate, your return above the inflation rate remains the same. Therefore, TIPS is highly beneficial for retirement investors in today’s market.

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