A dollar today shall not buy the same value of goods in a decade. This happens due to inflation. Inflation refers to the general increase in the price levels of goods and services within an economy over a specific period of time. As per Kavan Choksi, a specific amount of currency is able to buy less than before due to inflation. Hence, for investors, it is prudent to identify and leverage the appropriate strategies and investments to hedge against inflation.
Kavan Choksi marks the asset classes one may invest in to stay protected against inflation
The level of inflation in an economy changes as per the current events. Increasing wages and a rapid rise in the price of raw materials, like oil, are two major factors that contribute to inflation. Inflation is pretty much a natural occurrence in the market economy, and hence it is prudent for investors to prepare for it. There are many ways to hedge against inflation. Experienced investors generally plan for inflation by putting their money in asset classes that outperform the market during inflationary climates. Here are some of those asset classes:
- Gold: Gold is widely known to be a hedge against inflation. In fact, several people consider gold to be an “alternative currency”, especially in nations where the native currency is losing value. Such countries typically make use of gold or other strong currencies when their own currency has failed. Gold is a tangible, physical asset and is able to effectively hold its value for the most part.
- Commodities: Commodities are quite an expansive category. It includes natural gas, electricity, grain, oil, as well as foreign currencies and certain other financial instruments. Inflation and commodities have a unique relationship. In many cases, commodities can be an indicator of inflation to come. When the price of a commodity rises, so does the price of the products that the commodity is used to produce. Today it is possible to broadly invest in commodities through exchange traded funds (ETFs).
- A 60/40 Stock/Bond Portfolio: This is known to be a safe, traditional mix of bonds and stocks in a conservative portfolio. It is quite a simple and straightforward strategy. However, one must remember that while a 60/40 portfolio will help them to hedge against inflation, they are also likely to be missing out on returns in comparison to a portfolio with a higher percentage of stocks.
- Real Estate Investment Trusts (REITs): REITs are companies that own and operate income-producing real estate. As inflation goes up, so do the rental income and property prices. An REIT comprises of a pool of real estate that pays out dividends to the discerning investors. REITs may also have specific drawbacks, like their sensitivity to demand other high-yield assets.
- The S&P 500: These stocks have substantial upside potential in the long term. Businesses that gain from inflation typically require little capital in general. At the moment, the S&P 500 has a high concentration of companies associated with technology and communication services. Both technology and communication services are capital-light businesses. Hence, they are likely to be inflation winners.
As per Kavan Choksi, including inflation-hedged asset classes in the portfolio can significantly help investors in the long run. Diversification and a long-term investment perspective are vital for navigating the challenges posed by inflation and its impact on the stock market.