Inflation Proof Investments
3 of the 7 Inflation protection investments are Real Estate Based.
Stocks and Gold are other good hedge investments.
Cash is the worst
Rethink your strategies considering what I have outlined.
Yes, most of us want to buy at the Lowest Price and Sell at the Highest Price – You need to be lucky to achieve this.
Assess your borrowing capacity and be ready to capitalise on some good opportunities that may come up. Do not get caught flat-footed!
With inflation in the world’s biggest economies hitting a 25-year high, inflation is suddenly back on the radar for investors, and for good reason.
Inflation is the silent wealth killer, with the potential to undermine a portfolio’s
purchasing power, even if it maintains positive year-over-year returns.
If your portfolio grows at 3% per year but inflation is at 4%, your wealth is declining in real terms.
As a result, it’s important to know how your portfolio will fair if inflation rises, as well as what modifications you’ll need to make to protect yourself.
So, What Is Inflation?
When the consumer price index (CPI) shows an increase in the price of goods and
services, this is referred to as inflation. This can be due to an excess of demand vs supply, a deficiency of supply versus demand, or a mix of the two. Inflation has far reaching implications for investment returns, beyond merely raising the cost of your products and services by a dollar or two here and there.
What Is an Inflation Hedge, and How Does It Work?
An inflation hedge is an investment that is thought to protect against the currency’s
declining buying power. It normally involves purchasing an item with the expectation
that it will maintain or increase its value over time.
What Are Some Good Inflation-Protection Investments?
1. Residential Real Estate
In Australia, residential real estate has long been regarded as one of the best-
performing investments in a high-inflation environment. This is due to the fact that as inflation rises, property prices have tended to rise as well, increasing the amount a landlord can demand for rent. This allows you to keep up with the rising cost of living. As a result, investing in real estate is one of the most popular strategies to protect an investment portfolio against inflation.
2. Australian Real Estate Investment Trusts (AREITs)
Companies that own and operate income-producing real estate are known
as Australian Real Estate Investment Trusts (AREITs). When inflation rises, so do
property values and rental revenue. An AREIT is a real estate investment trust that
pays dividends to its shareholders. To target inflation even more specifically, you
can invest in non-discretionary commercial property, such as neighbourhood retail
centres, which have been found to perform well in high-inflation and low-growth
settings, as tenants will continue to benefit from solid levels of foot traffic.
3. Residential Mortgage-backed Securities (RMBS)
Residential Mortgage-Backed Securities are bonds that receive income from the residential mortgage repayments of Australian households.
These RMBS bonds – which are usually available only to institutional investors – are
issued by some of Australia’s strongest lenders including Westpac, National
Australia Bank and Suncorp.
RMBS are ‘floating rate’, which means that the investments receive a fixed interest margin above the floating bank bills rate. This means that if cash rates start to increase in response to inflation, then the coupon returns of RMBS investments will
also rise. Rising interest rates are a positive for RMBS distribution returns.
Firstmac is a major issuer of RMBS bonds, and also offers an RMBS investment
fund called High Livez, which gives ordinary investors access to this asset class
which is usually available only to institutional investors.
4. Stocks
Stocks have historically been a strong inflation hedge, with some sectors performing better than others.
Companies are best positioned to adjust to inflation because they can raise their prices in line with inflation. Investing in corporate shares can make sense since, in many cases, they can pass on cost increases to customers while maintaining profit margins and stock prices. Investing in businesses, with diversification through managed investment funds, is a wonderful way to protect against inflation.
These RMBS bonds – which are usually available only to institutional investors – are
issued by some of Australia’s strongest lenders including Westpac, National
Australia Bank and Suncorp.
5. Gold
Gold is the oldest form of inflation protection. If you invest in actual gold, however, you will incur additional charges for keeping and insuring coins and bullion, which will
reduce your profits. Although investing in gold-focused mutual funds and exchange traded funds (ETFs) can significantly lower these costs, it’s crucial to keep in mind that gold’s price is quite volatile, especially in the short term.
It’s also worth noting that, because gold normally generates no income, its
opportunity cost rises in a high-inflation environment, when alternative low-risk
assets, such as bonds, begin to offer higher yields.
6. Infrastructure
Infrastructure assets benefit from being regulated, either through formal regulatory
regimes or through ‘shadow’ regulatory pricing procedures buried in revenue contracts. This is particularly frequent in the utilities industry, as well as several ports and airports. Because revenues are increased by inflation and contain allowances for recovering the cost of debt, these assets are highly resistant to increases in
inflation and interest rates.
7. Cash
Cash is the most susceptible asset class during periods of rising inflation. Whether
you are retired or not, rising prices decrease the value of cash assets. A key technique for combating inflation is to reduce cash holdings.
As with all investments, it is important to thoroughly read all available information, and to speak with a qualified financial advisor before making any financial commitments.