Inflation can take the wind out of anyone’s sails when it comes to building a robust portfolio: when the purchasing power of the dollar goes down, our general financial holdings often take a hit as well. The pain in one’s pocketbook also gets felt in one’s portfolio.
During periods of financial instability, the specter of inflation looms large. The cost of goods may rise while wages may not. And even if wages do keep up with inflation, increasing prices and increasing salaries are likely to offset one another, which can have a dampening effect on one’s portfolio.
Although the effects of inflation seem somewhat unavoidable for your portfolio, there are ways to beat rising inflation. Central to these tactics are investment types that aren’t as exposed to the ebbs and flows of the stock market, such as farmland investing or alternative investments more broadly.
Here are a few tips on how you can hedge against rising inflation in your portfolio through a set of handy holdings.
Inflation can be a major drag on your portfolio. First, inflation rates can eat into modest portfolio gains. Let’s say, for example, that inflation increases by three percent: if your portfolio only grows by the typical Dow Jones average of five percent, your portfolio has only grown by a percentage point.
The reason? Purchasing power. When goods cost more, you need more money to buy them. Simple enough, of course, but this doesn’t just make your wallet lighter. If a share of a stock increases in price during an inflationary period, the purchasing power of that dollar is still lower than it used to be. This means your gains are weakened by a weaker dollar.
In other words, your investments have to outperform just to beat inflation. This becomes even more challenging when turbulent market conditions are the cause for inflation in the first place.
As the market plays a significant role in setting the stage for inflation, it can be hard to find solutions through conventional investments such as stock purchases and participation in funds. There are still some options through conventional investments that can serve as a hedge against inflation, however.
Despite not being the most glamorous financial product out there, mutual funds can help beat rising inflation by providing greater long-term returns than the rate of inflation. This doesn’t necessarily mean that they’ll offer you a sizable return, however—just that you’ll beat the percentage of inflation and still walk away with some gains.
The more you diversify your array of mutual fund investments, the more likely you are to outperform inflation. This can serve as a hedge against inflation impacting one or more sectors more aggressively than others. A good mix of mutual funds and exchange traded funds (or ETFs) can also help you spread your investments around.
Inflation does not affect all countries equally. An inflationary period in the United States may not mean that the United Kingdom is experiencing one, for example. This provides smart investors with an opportunity to look abroad as a way to beat rising inflation. Investing directly in international stocks, or through international stock funds, can open your portfolio up significantly. This can help you avoid having the entirety of your holdings held up in an economy going through inflation.
Ultimately, there are only so many options to beat rising inflation through the stock market. Real inflation-resistant investments have to be found in sectors of the economy that are either essential goods, or whose value does not fluctuate with the purchasing power of the dollar. For these options, investors should look into alternative investments as a prospect to beat rising inflation. Here are a few of the most common alternative investment options to keep inflation at bay.
Farmland investing is far and away one of the most inflation-proof investments around. The reason why investing in farmland holds up so well against other investment types is the perpetual need for farming in any economy - people need to eat, and this will never change. This makes farmland real estate particularly well-suited to retain value over time—even during recessions.
Better yet, farmland is far less oversaturated than other common alternatives designed to keep inflation at bay. This provides you with an option for greater returns and less competition. FarmTogether makes it easy to get started, too: you can get started with as little as $10,000 and choose from a wide range of choices. Each FarmTogether investment is selected by experts in the field, and our platform makes it easy to manage your investments at a glance.
Real estate investing can also be a compelling hedge against inflation. Most kinds of real estate retain their value even during periods where a dollar doesn’t go as far, making it a compelling option for investors that want to move their money into an inflation-resistant option.
One potential downside of real estate investing is that a reduction in purchasing power may dissuade people from buying properties, such as houses, when economic conditions aren’t buyer-friendly. Commercial real estate may also be harder to rent when inflation is high since many people might not be shopping with the same ferocity as they would during low-inflation periods.
People will always need grain, livestock, and oil (at least for now). Even if the purchasing power of the dollar slips when inflation is on the rise, these and other commodities hold their value due to how important they are in everyday life. Purchasing commodities through the alternatives market can help offset some of the challenges a stock and fund-heavy portfolio might experience during an inflationary period.
Some common commodity options also include gold, silver, and other precious metals. These investments are a common staple of a recession- and inflation-averse portfolio, and are among the most popular commodities around. They’re great at retaining value, and serve as a reliable option for parking one’s investing dollars when investors face financial headwinds.
Ultimately, there isn’t a surefire way to beat rising inflation entirely. This phenomenon affects almost every part of the economy in different ways (and to different extents). You can, however, take proactive measures to diversify your holdings in a way that accounts for sectors and investment types that are less directly affected by inflation.
This is where alternative investing can be a major resource for inflation-savvy investors. Incorporating investments that have proven to be historically inflation-resistant may help you offset other parts of your portfolio that can’t avoid but be affected by rising prices for goods. Farmland investing stands out as one of the best inflation-proof options out there. With FarmTogether, you’ll work with a team of experts who can guide you through the investment process and help you find opportunities that are particularly immune to inflation challenges.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.