Hedging is a strategy by which you can minimize risk and losses on your investments. In times of peak inflation, hedging becomes a necessary technique to stop your investments from dissolving.
Some asset classes are directly correlated to inflation and rise with the surge in inflation rates. While there are other investment options whose specific purpose is to safeguard against inflation.
As we exit the pandemic bubble, the market continues to adjust and currently witnessing a downtrend. The pain points of this bearish market are accentuated by sky-high inflation and interest rates. Tech stocks are crashing, and commodities prices are touching the roof.
Investors are grappling for shores of certainty, but the tides are turbulent and vengeful. It is crucial to erect walls of safety if we wish to protect our wealth from drowning in this deluge.
Here are six standard hedging strategies to use against inflation:
Ways to Combat Inflation and Build Immunity
1. Diversify into Uncorrelated Foreign Economies
Diversifying into foreign economies can defend against inflation risks. By investing in economies that are uncorrelated, you neutralize losses incurred from inflation in one with safety in other economies.
2. Invest in Bank Loans and Bank Bonds
Investing in bank bonds and loans is highly unlikely to turn awry. Banks raise interest rates to slow down lending as a way to tame inflation. Since banks profit from these high-interest rates, it is natural that bank securities fare well during inflation.
Banks provide insured as well as volatile investment options, depending on investors’ risk appetite. Certificate of Deposits and saving bonds are risk-averse investments, while bond mutual funds and stocks exhibit rapid movements.
3. Real Estate Securities
Real estate and inflation are positively correlated. So, as inflation surges and inhibits people’s purchasing power, real estate prices and rent climb up. Both physical properties and virtual real-estate investment trusts offer good returns that stay in tandem with the inflation rate.
4. Precious Metal Market
Precious metals like gold and silver have historically been attractive investment options for investors. Even though their value might not precisely follow the inflation curve, they are nevertheless reliable assets to hold and cannot be discounted.
Add Lithium to your basket, and you have an even stronger dam to hold off the rising inflation. Gold and Lithium ETFs are ideal gateways to begin your journey into precious metals.
5. Defensive and Finance Stocks
Stock trading is another viable strategy. Inflation causes basic commodity prices - like oil, gas, and wheat - to increase, which translates into a rally in the stock value of these companies. These stocks come under the umbrella of defensive stocks alongside healthcare, telecommunication, etc.
Tech and finance stocks are also appealing for their high growth and inflation-immunity, respectively, though the road might be fraught with volatility, as is the scenario at present.
6. Govt Bonds and Floating-Rate Bonds
Govt bonds like the US’s Treasury Inflation-Protected Securities (TIPS) offer a fixed rate of interest on investments by changing the principal amount with the inflation rate. Thus, consistently offsetting the potential abrasion from inflation.
Likewise, floating-rate bonds provide variable interest rates that follow a particular benchmark interest rate. These benchmark rates are strongly bound to the rate of inflation, ensuring a constant hedge.
Even though inflationary times are associated with market stagnation and opportunity paucity, with educated steps, you can survive the drought and come out on the other side unscathed.