Investing for Inflation: How Gold, Real Estate and Other Asset Classes Perform

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In the short term, equities could be less affected by inflation; some companies might actually show positive performance if inflation allows them to raise their prices. In the longer term, however, high prices could discourage consumers from spending money, and higher interest rates could increase borrowing costs for businesses. These two elements could have a negative impact on the performance of the shares.

Nevertheless, some asset classes generally fare better than others in an inflationary environment.

Which asset classes traditionally yield the most in times of high inflation?

Gold and other commodities

For centuries, gold has been one of the most classic hedges against inflation. (To some extent, other precious metals, such as silver, also fall into this category.) Gold is a physical commodity and is often seen as a safe haven – after all, gold will always have the value. Nevertheless, gold has been more volatile in recent years and some experts are expressing skepticism as to whether it really is the inflation hedge that many believe it is.

Treasury Inflation Protected Securities (TIPS)

A specific class of bonds is designed for times of inflation: Treasury Inflation Protected Securities, or TIPS. These are linked to inflation, so as the CPI increases, the value of your customers’ TIPS also increases.

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Another traditional hedge against inflation, real estate is a physical store of value that has the ability to generate rental income – and this rental income can increase during periods of high inflation. A word of caution: house prices are sensitive to interest rates, as high rates can affect consumer demand. In addition, high interest rates can affect the borrowing capacity of investors and therefore the overall demand for real estate investment.

Shares

Although inflation can hurt the stock market over the long term, some stocks react differently than others. High dividend stocks tend to suffer in times of high inflation in the same way as fixed income investments. Meanwhile, value stocks may have better pricing power to help them weather the storm, and companies with inelastic demand may find it easier to pass on their increased costs to consumers.

Cryptocurrency

One of the main selling points of cryptocurrency is its limited supply; no central authority can simply print more money. As a result, some investors view cryptocurrency as a hedge against inflation. However, at least right now, Bitcoin’s value has been closely correlated with that of the stock market. Despite its anti-inflationary underpinnings, many investors seem to be trading crypto as a speculative asset rather than a safe haven.

How to Discuss Inflation Investing Strategies with Your Clients

Many customers may be spooked, especially because inflation is such a mainstream news topic. You could calmly explain the macroeconomic factors at play — supply chain bottlenecks, pent-up demand, cycles of self-reinforcing consumer expectations — and factors that might be moderating the situation, such as monetary policy.

In the meantime, you can discuss clients’ long-term goals and how their portfolios stay focused on their individual goals. Then you can guide clients through your adjustments to their overall strategy to account for inflation protection, such as reallocating part of their bond portfolio to TIPS or continuing to invest in the market. immovable.

(Image: Adobe Stock)

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