In my last newsletter, we started talking about Inflation. In this edition, we’ll Learn more about how to hedge against inflation using “Real Assets”.
By definition, a ‘real asset’ is a tangible investment that has an intrinsic value due to its substance and physical properties. Examples of this are precious metals, commodities, real estate, land, equipment, and natural
resources.
I’ve shared before how gold and silver are excellent assets that can offer can offer stability within any investor’s portfolio. It’s all the more true during times of inflation as the price of precious metals also goes up while demand remains strong.
Real assets have historically been seen as ‘hedges’ against inflation and are essential to protecting your portfolio. An ‘inflation hedge’ is an investment that protects investors from the declining purchasing power of money due to inflation. The investments are expected to maintain or increase in value during inflationary cycles.
Here’s my advice and reasons why real assets are the way to go—
- Diversify Your Portfolio: Real assets provide portfolio diversification stability and protection. They also often move in opposite directions to financial assets like stocks or bonds.
- Housing Goes Up Too: You can collect increased rental income from your real estate property, capitalize on low mortgage interest rates while it lasts, or sell your property at a higher rate.
- Inflation is Your Friend: Unlike with currency, real assets like land tend to increase in value over time. The consumer price index (CPI) will continue to rise in years of both economic growth and recession.
Watching Inflation through the Consumer Price Index
The Consumer Price Index (CPI) is the most widely used measure of inflation. It’s the figure that indicates whether the economy is experiencing inflation, deflation or stagflation, like the most recent reported rate of 7.9%.
As the average change in price for household goods and services, the CPI is often referred to as the cost of living index. It only considers consumers’ day-to-day consumption. It excludes investments (stocks, bonds, etc.), life insurance, real estate, and other items as these items relate to savings.
Because inflation reduces purchasing power, retirees on fixed incomes suffer when they hold onto their cash. This is why financial advisers recommend that retirees keep a percentage of their assets invested in the market and in diversified assets as a hedge against inflation.
The CPI is also used to adjust wages, retirement benefits, tax brackets, and other important economic indicators. A cost-of-living adjustment (COLA) is an increase made to Social Security to offset inflation.
The COLA for 2022 is 5.9%, meaning for someone who received $10,000 in Social Security benefits in 2021, their 2022 annual benefit would total $10,590. This is crucial to hedging loss in one’s retirement fund but it doesn’t completely mitigate the effects of inflation. For most retirees, pension benefits are not enough to sustain their cost of living independently.
If you’d like to secure your hard-earned wealth against inflation, building a robust financial portfolio is a must. My advising expertise ranges from gold & silver and cryptocurrency to real estate.
If you’d like to schedule a call with me, I can offer you more information and answer any questions you might have. We’ll discuss the investment options best suited for you.
