Inflation is one of the significant economic specters that can haunt an investor’s dreams. It’s the ogre that slowly but surely eats away at the value of investments, whether they be in stocks, bonds, or even cash.
Fortunately, there are ways to hedge against inflation and protect your portfolio from its ravages. By investing in assets that tend to move inversely to inflation (such as real estate or gold), you can help offset the impact of rising prices on your overall returns.
Bill Schantz Explains How Inflation Impacts Investments
Inflation is how rapidly the prices of goods and services rise over time. When inflation is high, each dollar you have buys less than it did in the past. Inflation is often called the “silent thief” – it can stealthily eat away your wealth if you’re not careful.
Inflation can have a significant impact on investments, especially those that are denominated in cash. For example, let’s say you have $100 invested in a bond that pays 5% interest per year. In year one, your investment is worth $105 (5% of $100). In year two, however, inflation has risen to 3%. This means that your $105 is only worth $102 in real terms (after adjusting for inflation). In other words, you’ve lost money on your investment even though it’s still paying 5% interest!
Of course, not all investments are impacted by inflation similarly. In general, stocks appreciate when inflation is high, as companies can raise prices on their products and services to offset the higher business costs. On the other hand, bonds can suffer under inflationary pressure as their fixed payments become worthless over time.
How to Hedge Against Inflation with Your Investments According to Bill Schantz
Here are Bill Schantz’s top tips on how to invest to hedge against inflation:
Consider Investing in Real Estate
Real estate is an excellent way to hedge against inflation because it tends to appreciate as prices rise. This is because there is a limited supply of land and buildings, while demand for these assets usually increases as populations grow and economies expand.
Gold Is Another Inflation Hedge
Gold is often seen as a safe haven during economic turmoil and inflation. This is because it tends to hold its value well concerning other assets, such as stocks or bonds.
Invest In Commodities
Commodities are another asset class that can be used to hedge against inflation. This is because they are essential goods used in various industries, so their prices tend to increase along with inflationary pressures.
Consider Treasury Inflation-Protected Securities (Tips)
TIPS are a type of bond issued by the US government that protects against inflation. The principal value of these securities is adjusted for changes in the Consumer Price Index, so they can offer investors a real return above and beyond inflation.
Build A Diversified Portfolio
As per Bill Schantz, one of the best ways to safeguard your investment against inflation is to diversify your portfolio across various asset classes. This way, if one asset class suffers from inflationary pressures, you will still have exposure to other assets that may be doing well.
Invest In Companies with Pricing Power
Companies that have pricing power are those that can increase prices without losing customers. These companies tend to do well during periods of inflation because they can pass along their higher costs to consumers without seeing a decrease in demand.
Focus On Quality Over Quantity
When investing in stocks, Bill Schantz believes it’s essential to focus on quality over quantity. This means finding companies with strong balance sheets, solid fundamentals, and a history of outperforming the market.
Have A Long-Term Perspective
Inflation is generally a slow and steady process, so it’s essential to have a long-term perspective when investing. This way, you can weather the short-term fluctuations in asset prices and come out ahead.
Bill Schantz’s Final Thoughts
Inflation can have a significant impact on investments, especially those that are denominated in cash. This is because inflation causes the prices of goods and services to increase over time, leading to investors losing purchasing power. However, according to Bill Schantz, there are several ways to hedge against inflation with your investments, including investing in real estate, gold, commodities, Treasury Inflation-Protected Securities (TIPS), and companies with pricing power. Building a diversified portfolio and having a long-term perspective when investing is also important.