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Published on: 04/01/2023 • 4 min read

How to Hedge Against Inflation

Although inflation has historically been a natural part of the ebb and flow of the economy, it has recently grown to unprecedented highs, and can pose a serious problem for individuals and business owners who are not prepared. Fortunately, there are a number of strategies and tools available to help you hedge against inflation, protect your assets in the long run, and maybe even come out on top.

Curious about how to hedge against inflation? As a high-net-worth wealth management firm with experience helping our clients implement risk management strategies into their financial plans, we know how important it is to have a well-developed strategy for hedging against inflation, and we’re here to help you learn how to do so too.

Here are some tactics you can use to build a comprehensive inflation-hedging strategy.

1. Diversify your portfolio across different asset classes

By investing in a variety of assets such as stocks, bonds, real estate, currencies, commodities, etc., you can work to create a portfolio that balances risk while still providing exposure to potentially high-yielding investments. Diversification can help reduce overall volatility while also allowing you to take advantage of opportunities during market shifts. 

For example, when it comes to investing in stocks vs real estate during inflation, stocks may be a good option for short-term growth, but their value can drop quickly in the face of inflation. Real estate, on the other hand, tends to retain its value, or even increase in value, as inflation rises, making it generally more resistant to the effects of inflation than cash equivalent investments with intrinsic value unaffected by fluctuations in currency.

Continue reading: How does inflation affect the stock market?

2. Invest across different sectors

In addition to diversifying across asset classes like stocks, bonds, and real estate, you can also consider investing across sectors that have been shown to perform well during inflation, such as precious metals, energy, and commodities.

This type of diversification helps reduce overall volatility and allows investors to take advantage of opportunities created by market shifts, changes in economic conditions, or major political events. By having a fine-tuned strategy for hedging against inflation, investors can protect their assets from the damaging effects of rising prices over time.

3. Check the consumer price index (CPI)

One of the most useful tools for hedging against inflation is the Consumer Price Index (CPI). The latest CPI report measures changes in the cost of a basket of goods and services purchased by consumers. By tracking the CPI, you can get a high-level view of how inflation is impacting the economy and make decisions accordingly.

4. Invest in inflation-linked assets

Another way to hedge against inflation is to invest in assets that increase in value as inflation increases. Gold and silver are two examples of commodities with values that historically have been shown to rise with higher levels of inflation. As previously mentioned, when weighing your options for investing in real estate vs. stocks, choosing real estate can be a good hedge against inflation since property values often rise with increasing prices over time. 

5. Utilize tax strategies

This can be done by investing in investments that offer favorable tax treatment, such as municipal bonds, which are exempt from federal, state, and local taxes. Additionally, utilizing tax strategies like tax loss harvesting can help investors generate additional cash flow by selling investments at a loss and using those losses to offset taxes on other gains.

Learn more about capital gains tax on Texas real estate

6. Plan for inflation before it hits

Rather than waiting for inflation to become a problem, the best hedge against inflation is for investors to plan ahead and prepare for the potential impacts of price increases. This can be done by creating a plan to diversify and hedge investments, as well as utilizing tax strategies that can help reduce the overall impact of inflation on investment returns. Doing so can help protect investors against the damaging effects of rising prices in the future and prevent them from being too heavily invested in the worst investments during inflation by the time that prices peak.

Concerned about your portfolio’s ability to hedge inflation? Let’s talk!

Knowing how to hedge against inflation is an important strategy that should not be overlooked by individuals or businesses who want to protect their finances from economic forces beyond their control. While rising prices and unstable markets can damage an unprepared portfolio, being prepared can make the situation much more manageable. 

Taking proactive steps such as investing wisely across different asset classes and sectors and implementing the correct tax strategies can help provide some security from inflation’s effects and help you weather the storm.

If you’re looking for assistance in assessing your portfolio’s ability to hedge inflation, our experienced financial advisors are here to help. At Avidian Wealth Solutions, we understand that every investor’s situation is different and can offer tailored advice on how to survive inflation as a high-net-worth family, small business owner, or executive.

Schedule a conversation with us today to learn more about our comprehensive approach to wealth management.

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