If you’re of a certain age, you may remember the inflation of the 1970s. Rising prices in supermarkets and at the gas pumps were part of the childhoods of many investors 55 and older. A trip to buy groceries or gas today may seem like we’re returning to the bad old days.
During the 1970s, inflation rose by more than 9% a year, prompting then-President Gerald Ford to wear a WIN button for “Whip Inflation Now.”
During the same period, stocks declined about 4% annually, so investors in equities took a beating.
Younger investors may not remember significant periods of inflation, and all of us may need a refresher course on what inflation means in the investing world and how portfolios can be protected from inflation.
A dollar doesn’t buy what it used to, and it won’t buy what it does today in 10 years. This change is due to inflation, which can be caused by world events, shortages and natural disasters. Rising wages and more dollars in the economy can also cause inflation.
Finding asset classes that perform well during times of higher-than-normal inflation will be essential now and in years to come. Hedging against inflation will shield your investment portfolio from decreases in value.
Here are five tried-and-true inflation hedges you can add to protect your stock portfolio from eroding in value.
Gold
Gold has traditionally been a hedge against inflation because it’s not directly tied to the value of the dollar. The shiny yellow metal has also been a refuge for turbulent economic times. If you’re considering investing in gold, consider purchasing SPDR Gold Shares ETF (GLD, Financial) or VanEck Gold Miners ETF (GDX, Financial), which is based on the performance of gold mining companies.
TIPS
Bonds tend to do best when going from a period of high inflation to low, and not the other way around. This is why Treasury Inflation-Protected Securities, or TIPS, are a popular hedge against inflation. These inflation-protected bonds’ principal and interest payments to investors rise during high inflation and fall during relation. The iShares TIPS Bond ETF (TIP, Financial) gives investors exposure to the domestic TIPS market in one fund.
Commodities
Since the prices of commodities such as oil, natural gas, precious metals and grains tend to rise during inflationary times, commodities can be a hedge against inflation. Commodities are traded on futures markets. Because of their complexity and volatility, commodities may not be the best choice for a beginning investor. An easier option might be to buy shares of a commodity-based exchange-traded fund such as the Invesco DB Commodity Index Tracking Fund (DBC, Financial), but it doesn’t remove the risk and volatility of investing in commodities.
REITs
Real estate and rental income tend to rise during inflationary periods, making now a good time to consider purchasing shares of real estate investment trusts. These pools of real estate holdings pay out dividends to their investors, which is a passive income. Plus, a low-fee way to enjoy a broad exposure to REITs is to invest in a REIT ETF such as the Vanguard Real Estate ETF (VNQ, Financial).
Cryptocurrency
Of course, the 1970s didn’t have cryptocurrency options as a hedge against inflation, but bitcoin and other cryptocurrencies aren’t tied to the value of a dollar. As a result, cryptocurrency can be a way to protect your portfolio from decreases in value due to inflation. Individual cryptocurrencies can be purchased from platforms such as Robinhood, or you can gain exposure to cryptocurrency by purchasing shares of the ProShares Bitcoin Strategy ETF (BITO, Financial).
