How to Protect Against Inflation
Inflation threatens both your purchasing power and long term wealth accumulation. What if your net worth is tied up in your business or your 401(k) and other retirement accounts, but you want to be sure that you are hedging against inflation? This post is meant to be a practical application piece that will allow you to take steps today towards protecting your investment portfolio from inflation.
Owning Hard Assets during Hard Times
Famed investor Jim Rogers was recently interviewed about inflation and economic turbulence to which he advised owning hard assets for hard times. That’s great advice, but what does that mean exactly for the average investor? Hard assets could include many things but some that come to mind right away are precious metals, income producing real estate, farmland, and other tangible assets. Inflation is the decrease in purchasing power (the US dollar in this case) along with the increase in prices of goods. It makes sense that commodities tend to do well during the early onset of high inflation, but eventually commodity producers catch up with demand which ultimately brings the prices back down. Having said that, owning some commodities can hedge against inflation but probably not a great long term strategy.
So, if precious metals, real estate, and farmland all help shield against inflation risk, how do you invest in them today? The simple answer is that there is no simple answer, it really depends on your situation and whether or not you have control of your investment options. Let’s take a look at how business owners can protect themselves against inflation as well as employees/professionals.
If you own your own business but a good portion of your net worth is concentrated in your business along with your company retirement account, you need to be sure that your investment portfolio is protected from inevitable inflation. You can invest in the aforementioned hard assets outside of your companies’ retirement plan, but if you work with an independent financial advisor that can offer an open architecture plan for your business, you can actually offer exchange traded funds, REITS (real estate investment trusts), and other securities that give you exposure to real estate, gold, and farmland within the retirement plan. You might also consider holding some of your company reserves in less volatile hard asset funds to ensure that your company retains it’s purchasing power throughout the inflation run up.
As an employee, it is a little bit harder to control your investment options within your company retirement plan. You can request more options through your plan administrator or your HR director, but beyond that, you can put together a plan to diversify your investment holdings by opening a separate IRA or brokerage account (we recommend a trust platform that does not rehypothecate your assets). Be sure to use a self-directed option when opening your account so that you have the option to own physical property within your account now or in the future. By allocating a percentage of your paycheck to your company retirement plan (taking advantage of any matching funds at a minimum) as well as a percentage to your inflation hedging account, you will ensure that you are dollar cost averaging your investments month over month.
While your investment options are near endless in today’s market, you are more limited when it comes to owning hard assets or even funds that invest in hard assets. If you want to invest in real estate that produces income you can simply purchase an investment property directly or you can invest in a REIT that holds the real estate for you and typically pays out quarterly dividends. The same is true for farmland; you can go out and purchase a farm to cash rent to a local farmer to produce an income or you can own a fund/REIT that owns the farmland and issues a quarterly dividend. Both real estate and farmland are considered alternative investments, so be sure to seek out an advisor that has a good understanding of these asset classes before engaging in a new strategy.
The third asset class mentioned, precious metals, has a few different ways to gain exposure to it. The main two precious metals being gold and silver, you can simply own physical gold or silver and store it yourself or off site. You can also own shares in a physical backed fund (avoid non-physical backed precious metals funds) that allow you to take possession of the metals if you so choose. Beyond owning the metals themselves, you can gain exposure by investing in the companies that mine the metals themselves or you can invest in royalty companies that own a percentage of all the metal mined on particular areas of land. These royalty companies traditionally have less volatility than the mining companies as they have much fewer expenses. You can also gain exposure to commodities like oil and gas by owning royalty companies that specialize in these areas, much like the gold royalty companies.
When assembling your inflation hedging portfolio strategy, be sure to work with an advisor that understands these markets and can help you put together a plan that meets your unique needs, as there is no one size fits all investment strategy.