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Published: Nov 10, 2021 8 min read

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Stock market graph representing inflation with a bitcoin and some gold bars overlayed. A question mark is on the side.
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As an investor, it's easy to figure out you need to worry about inflation. Knowing what to do about it can be a lot harder.

On Wednesday, the U.S. Bureau of Labor Statistics said the consumer-price index, a measurement of the costs of goods and services that range from food to gas to shelter and more, rose by 6.2% year-over-year in October. That marks the biggest single-month jump in more than 30 years.

So how do you make sure your portfolio beats inflation?

Here are five investments Wall Street commonly pitches as ways to protect yourself against rising prices.

1. Stocks

Since 1926, the S&P 500 has returned about 10% per year, on average. The S&P 500 is an index tracking some of the biggest U.S. stocks and is seen by many experts as a reliable representation of the overall stock market.

The S&P 500’s total year-to-date return has been about 26%. So if you invested in a fund that tracked the S&P 500 last year, you likely would have beat today’s rate of inflation around four times over.

“I'm always amazed how many people forget that ordinary stocks are an inflation hedge over the long-term,” says Asher Rogovy chief investment officer of Magnifina Personal Investment Advisors. “Spikes in inflation and interest rates can certainly harm stock returns in the short run, and many investors in the ‘70s remember this well. But stock shares represent a real and productive asset. If prices rise, so too should revenue."

That doesn’t mean you should throw all your money into the stock market. If the stock market faces a major downturn while you're in or nearing retirement, you're likely to take a hit you have little time to recover from. The solution is to diversify your investments, so other asset classes can pick up the slack when one or more drops.

2. Real estate investment trusts

Property values and rent tend to rise along with inflation, so investing in real estate can be a good hedge against inflation. One of the easiest ways to invest in real estate is through REITs or real estate investment trusts.

REITs are companies that own income-generating real estate like single-family rentals, hotels and office buildings. Shares of various REITs trade on major stock exchanges, so you can invest in REITs through most brokerage accounts.

By law, REITS must distribute 90% of their taxable income to shareholders in the form of dividends each year. So REITs can provide a steady stream of income.

In the last 30 years, an index tracking U.S. REITs outperformed the S&P 500 in five of the seven years when inflation was 3% or higher, according to research by Neuberger Berman.

“Right now, we think that current cash flow and growth opportunities in many segments of the real estate market make those assets an attractive potential inflation hedge," Ford Donohue, director at Homirch Berg Wealth Management, said in an email to Money.

However, it’s important to carefully vet REITs. Like mutual funds and ETFs, REITs charge management fees, which can eat away at your returns. REITs also tend to underperform when interest rates are high.

Donohue says allocating 10% of your portfolio toward real estate can be reasonable for someone with a high risk tolerance and long time horizon.

3. Commodities

Commodities are raw materials consumed or used to make other products. Think crops, steel, oil, and more. Many experts believe commodities are good inflation hedges. The idea is that if stuff is getting more expensive, so are the building blocks used to make it.

A study by the investment firm Vanguard found that in the last decade, for every 1% rise in inflation, the Bloomberg Commodity index—which tracks futures price movements of different commodity sector—rose between 7% and 9%.

One of the easiest ways to invest in commodities is through commodity ETFs. These funds target a particular commodity like oil or a mixture like oil, steel and more. You can also invest in stocks of companies involved in commodities.

“Rather than investing directly in commodities such as gold, oil, or gas, we typically prefer to invest in the equity of companies that might benefit from a rise in the prices of these commodities,” Donohue says. “Unlike commodities, companies produce cash flows that we generally expect to grow over time. A steady stream of cash flows can help an investor to determine whether an asset is priced reasonably and should be a driver of long-term growth in its value.”

4. Gold

While gold is a commodity, it really deserves attention all on its own, given its popularity and the number websites and TV commercials that pitch it as the ultimate way to protect your wealth. As it happens, historical data shows gold’s performance has been mixed in times of high inflation.

An analysis by Morningstar found that during the period of raging inflation between 1973 and 1979, when the average annual inflation rate stood at 8.8%, gold returned 32%. Gold shined here. But gold investors saw negative returns during other high-inflation periods.

High inflation period: 1980-1984

  • Average annual rate of inflation: 6.5%
  • Gold return (Based on LBMA Gold Price PM USD): -10%

High inflation periods: 1988-1991

  • Average annual rate of inflation: 4.6%
  • Gold return (Based on LBMA Gold Price PM USD): - 7.6%

This doesn’t mean gold shouldn’t play a role in your portfolio, especially during times of hyper inflation or stagflation (extremely high inflation coupled by high unemployment.) But it shouldn't take up the bulk of your investments. Most financial advisors typically recommend no more than 10% invested in gold.

If you want to invest in gold, one of the easiest ways to do it is through a gold ETF. This takes away the hassle of buying and storing actual pieces of gold.

5. Cryptocurrency

Cryptocurrency seems to be all the rage right now. Many point to Bitcoin’s meteoric rise (400%+ average annual return since 2011) as proof it can hedge against inflation. But remember, Bitcoin and other cryptocurrencies have undergone extreme market swings.

Cryptocurrency is also generally new. So there’s not much evidence testing how it performs under long-term inflation periods.

“As inflation kept accelerating starting April, Bitcoin's price dropped by about 50% from the April peak to $32,500 in mid-July,” Alvin Carlos, Managing Partner at District Capital Management in Washington, DC said. “Not what you'd expect from an inflation hedge.”

Cryptocurrency can mean serious returns for those who can stomach its volatility and have a high risk tolerance. Nonetheless, many experts suggest it shouldn’t take up a major chunk of your retirement portfolio or liquid assets. Stick with 5% or less, many experts recommend.

“There isn't enough data to show that you could actually live off of crypto and sustain above the rate of inflation, so you don't lose your purchasing power,” certified financial planner and Rocket Dollar CEO Henry Yoshida said.

Plus, you can’t use crypto for everything right now.

“You can’t buy most things you use in your day-to-day life with crypto,” Yoshida says. “You can’t pay your electric bill in crypto.”

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