What Is Hedging against Inflation?

Hedging against inflation, also referred to as inflation hedging, is a process of investing that aims to avoid loss of wealth or purchasing power at a later date.

There are numerous ways to hedge against inflation to better protect your wealth in the long term. Simply keeping your money in a traditional checking account or savings account is not going to protect your wealth. Finding ways to actively build a store of value that exceeds the real costs of inflation is the key to success. Hedging is a bit like insurance in that there are costs upfront and/or along the way, but if you ever need to make a claim on your insurance it is likely to financially save you.

So how can someone hedge against inflation? Here are four ideas.

1) Focus On Your Career Growth

This may or may not entail obtaining a degree from a college or university. To be successful in life there is no strict requirement of getting a degree, but it may help depending on the career direction you decide to take. No matter if you get a degree or not, continuing to learn has a strong correlation with career growth.

By continuing to learn, whether it be learning in your field or another that you aspire to be in, you build skills that can help you throughout your career. This human capital element provides value for other people that you can profit from. Expanding your skills also allows you to transition into other careers more easily than someone who has limited skill mobility. This could come in handy if your job or career is no longer available.

Hedging against inflation by investing in your career growth may cost you upfront or throughout the process of personal development, but you will get a good return on investment in the long term. It will ensure you have a growing stream of income throughout your career that increases faster than the rate of inflation.

2) Build a Diverse Portfolio

Consider storing some of your money in a wide range of stocks and diverse investments. As the saying goes, “Don’t put all your eggs in one basket.” If one investment does poorly, at least you have your other investments to rely on.

Consider investing in:

• Companies that have historically performed well

• Innovative companies leading their fields

• Cryptocurrencies like Bitcoin or Ethereum

• Stocks that offer recurring dividends

Be cautious about storing the brunt of your money in just one of these investments. Instead, try spreading out your investments and keeping an eye on their performance at least quarterly.

3) Invest in Precious Metals

Precious metals such as gold, silver, platinum, and palladium tend to hold their value over the long term and can thus be used as a means of hedging against inflation. An ounce of gold in 1993 had a price of $391.75, in 2003 an ounce of gold was trading for $417.25, and an ounce of gold today is in the high $1900s. Gold has especially maintained its overall value throughout history, and it is likely to continue to do so.

4) Buy Real Estate

Investing in real estate is a time-tested investment for a long-term hedge against inflation. Whether the real estate is for your primary home or a rental investment property, properties tend to increase in value at a faster rate than losses incurred by inflation. This is especially true because of the ability to put a relatively small amount down upfront for good debt which can help thrust a person financially forward.

When financing an investment in real estate, it puts someone else’s money to work for a property you maintain. As long as you maintain the property, the value is likely to increase over time and there will be significant returns to be gained once the property is sold.

Closing Thoughts

Whether you want to invest in your career growth, a diverse portfolio of stocks and cryptocurrencies, precious metals, real estate, or a unique combination of the four, these are great ways to hedge against inflation. There are no guarantees about what is to come, but it is always better to be well-prepared to secure your wealth.

Credit goes to Joshua D. Glawson – He is a writer on such topics as politics, economics, philosophy, finance, and personal development. He has a bachelor’s in political science from the University of California Irvine and is the Content Manager of Money Metals Exchange.

Image Credit: Paweł Szymczuk – Pixabay

Source: 4 Ways Young People Can Hedge against Inflation