How to Hedge Your Portfolio Against Inflation

Hedging against inflation is important to consider when investing, to ensure that your invested money retains the same purchasing power over the long-term. With central banks around the world keeping interests rates low and otherwise increasing the supply of money, inflation concerns have risen. Here are simple steps to hedge your portfolio better against inflation.

Difficulty: Moderately Easy

Instructions

1. Add commodities to your portfolio, through ETFs, ETNs, or mutual funds. Commodities typically perform well in periods of high inflation, because they are scarce "hard assets" and often do not correlate to performance of stocks. Commodity ETFs have made it easy for individual investors to gain exposure to commodities without the complication of directly trading commodity futures.

2. Consider buying some gold or silver coins or bullion. Over the very long-term, these previous metals have retained their purchasing power. It is quipped -- though accurately -- that one ounce of gold will buy you a nice, but not outrageously expensive, tailored business suit today, just as one ounce of gold would buy the same in the 1800's. Note, however, that these are a hedge for the very long-term. Gold and silver can experience substantial price fluctuations in the short and medium term. In addition, gold and silver prices can stagnate for very long periods (such as gold in the 1990's). So consider these options as better inflation hedges over your investing lifetime.

3. Add exposure to real estate, either directly or through real estate investment trusts (REITs). Real estate is a great long-term inflation hedge. In fact, most of the "gains" that people think that they make on real estate are in fact just due to inflation. Outside of the recent real estate bubble in the U.S., real estate prices in inflation-adjusted terms have barely moved. As with the other investments above, however, the real estate market is subject to many, many other forces besides inflation. So consider this option as best for the very-long term as well.

Tips & Warnings

• Your time horizon is key to protecting your portfolio from inflation. All of the most popular "inflation hedges" are subject to market forces which means that you can lose money, especially in the short and medium term. So in order to best protect your portfolio from inflation, you need to be able to set aside some investing money for long-term investments which you will not trade for possibly a decade or longer.