How to Hedge Against Inflation: How To Protect Your Investment
Let us look at inflation from an investment perspective. Is it possible not only to survive inflation but also to make money?
19:39 25 August 2021
Inflation. Such a scary word for the consumers. However, whether we like it or not, inflation was, is and will always be. And it’s not as bad as it may seem, as low and medium inflation is favourable for the economy as a whole. Low and stable price growth means a healthy economy: companies produce; consumers buy; business, employment and wages rise.
How to benefit from inflation?
Let’s look at inflation from the investment perspective. Is it possible not only to survive inflation but also to make money?
Well, first of all if you want to save your money and gain profit, then banks are not the best idea for that as bank interest rates are often very low. Why is it bad? Because when inflation is growing, it’s eating your money. Not cool, right?
So, to hedge against inflation it’s better to choose investments that imply not only profit but growth. Something like stocks. Usually share returns exceed inflation as together with increase in prices increases income. In the long term, the stock market almost always generates income above the inflation rate.
Moreover, when people think that prices are going to rise in the near future, they start buying more goods, and businesses rise. However, that is not to say that share returns will always exceed inflation as not all market movements can be predicted.
Inflation and your portfolio: what you should know
So, to add protection to portfolios you should remember some things:
1. Diversify your portfolio. If stocks of a company from one sphere start falling as the inflation’s growing, there will alway be some company whose stocks will be rising at the same time. There’s usually balance in our world. That’s why if you have a diversified portfolio (portfolio consisted of stocks from different fields, ETFs and bonds), you are more likely to not lose your money and maybe even get some gain. Good news is that online trading apps like Orca provide a lot of possibilities to diversify your portfolio. For example, investment collections could be a great choice.
2. Real estate could be a good investment. In comparison to stocks and bonds (if we’re not speaking of government bonds), real estate faces less risk as it’s highly unlikely that its value will drop to zero. However not impossible once you factor in borrowing against the property. Of course if we're not talking about hyperinflation when people can’t pay their rents, some move to other countries to find jobs, CEOs have to fire their employees and don’t need big offices. But the good news is that nothing lasts forever.
So, tips to hedge against inflation are:
- Investing not saving;
- Long-term investment;
- Investment in ETFs, commodities, real estate and, of course, stocks and bonds.
These tips can certainly help you to minimise risks and add protection to your portfolio during inflationary times, but as always there’s no guarantee. If you have doubts, you can use stocks and shares ISA calculator to try to predict your possible income. And of course choose wisely, analyse the companies you want to invest in and keep calm.
Orca does not provide investment advice. If a customer has any doubts, they need to contact an investment adviser. Terms and conditions apply. Your Capital is at Risk.
Orca is an appointed representative of RiskSave Technologies Ltd, which is authorised and regulated by the Financial Conduct Authority (FRN 775330).