Investing seems like an easy concept, but the truth is it is highly complex. Yes, anyone can invest money – it doesn’t take much to buy a few stocks and shares – but to truly know what you’re doing you need to be aware of different terms and ideas.
One of the most important of these is to “hedge against inflation”.
It’s something all keen investors need to know, so here’s everything you must learn about it!
What does it mean to hedge against inflation?
To know this, we must briefly define inflation.
Inflation is the rate at which the value of a currency is decreasing, which drives the price of everything up. It happens all the time throughout economic history – and a higher inflation rate usually means big economic issues are happening.
In the UK, the current inflation rate is 3.40%, which is higher than the long-term average of 2.83% yet significantly lower than what it was this time last year (over 105).
Therefore, if you hedge against inflation, you’re investing in something to protect yourself against the decrease in the purchasing power of money. It’s a way of covering your tracks during periods of harsh inflation so you come out the other side in a good position.
Why should you hedge against inflation?
The biggest reason to hedge against inflation is that it protects your assets and investments during times of economic strife. If you make the wrong investments during this time, their value will decrease as inflation rises, meaning you lose a lot of money.
In other words, hedging against inflation gives your money room to grow while inflation wants to eat away at it. That’s why everyone should learn how to hedge against inflation, giving them the chance to move money around and avoid significant losses.
How do you hedge against inflation?
This is the big question: how do you hedge against inflation? If the purchasing power of money goes down, won’t this mean that all investments are worthless?
Not necessarily. Some investments thrive during inflation while others can at least remain stable and help you avoid losing money. Here are some of the best ideas to consider:
- Invest In Real Estate – Believe it or not, real estate is a great hedge against inflation. Despite inflation rising, people still need places to live. The demand for homes continues at a steady rate, but inflation means the cost of these houses goes up. That’s why property prices have increased dramatically over the last year or so due to inflation in the UK. If possible, find affordable cities to invest in real estate and get on the property market. It gives you a powerful asset and you can put your property up for rent, taking further advantage of inflation by setting higher-than-normal rental rates.
- Invest In Commodities – Sticking your money in commodities is a wise way to keep it stable during periods of economic recession and inflation. Precious metals are typically the best and many people are starting to buy silver Britannias or other physical coins to tie their money into silver or gold commodities. Over time, the price of these commodities remains stable and can even increase during inflation. As a result, it becomes the perfect hedge.
- Diversify Your Investments – Having a diverse investment portfolio is always the smartest decision for long-term growth. However, when you want to hedge against inflation, diversity becomes a crucial way to continue earning money. Don’t just focus on investing in different things; look to different markets in other countries. If your country is experiencing big inflation, perhaps it’s better to invest internationally in more stable economies. This is often where you find better stocks and bonds to invest in with more chance of growing your money despite the rising cost of inflation.
Overall, hedging against inflation is every investor’s top priority. You don’t want inflation to undo all the work you put in over years of investing. Many people’s life work can be undone in just a few months thanks to the rising cost of goods/services and the diminishing value of the local currency.
We hope this article explains the importance of hedging your investments against inflation while also providing a few examples of how to do so. For a lot of people, investing in commodities is the safest bet as it’s the most accessible investment out of the three mentioned. If you can, investing in real estate is arguably the “best” way to make money during periods of high inflation.
