For the majority of Americans, rising prices have become next to unavoidable. In many ways, inflation can be a silent wealth killer. Kavan Choksi Professional Investor says that inflation has the potential to erode the purchasing power of the portfolio of an investor, even if they manage to maintain positive returns year-over-year. Hence, to beat inflation risks, one should try to invest in assets with returns that outpace the rate of inflation.
Kavan Choksi Professional Investor sheds light on the investments that can help beat inflation
It would essentially be better to invest in diversified index funds based on broad market indexes like the S&P 500, as opposed to holding on to cash. This approach allows investors to diversify and grow their portfolio while also lowering the risk of loss due to inflation. One would get to earn even more as they reinvest their returns, thanks to compounding returns. The sooner one starts investing and the longer they hold on to the investment, the better it is likely to be. Even though no one can exactly predict future market trends, smart long term investments in particular assets are a good way to stave off inflation.
Gold is among the oldest hedge against inflation, and has seen an average annual gain of 9.48% over two decades between September 2001 and September 2021. Over the same period of time, inflation averaged 2.4%, providing investors with a 7.08% rate of return. However, if one does invest in physical gold, they must consider the additional costs associated with storing and insuring coins and bullion. To steer clear of such expenses, it can be a good idea to invest in gold-focused mutual funds and exchange-traded funds (ETFs). But even after doing so, one must remember that the price of gold is highly volatile, particularly over the short term.
Investing in a diversified portfolio of stocks is also a widely popular way to manage inflation risks. The S&P 500 generated an average annualized return of nearly 11% (with dividends reinvested) from July 2012 to July 2022. Even after accounting for inflation, this would result in about 8.3% average annual returns. To benefit from such substantial growth, one does not even have to pick individual stocks, which can be both risky and require intensive research. Rather, they can just start by choosing an S&P 500 index fund or S&P 500 ETF, which tracks the index’s return and keeps costs low. As they contain hundreds of stocks, it would be a good way to enjoy simple, low-cost diversification, which lowers portfolio management concerns and risks.
As Kavan Choksi Professional Investor says, a large number of inflation-averse investors even turn to real estate to hedge their holdings. However, the sheer size and variability of the market can make it very difficult to generalize about this specific asset class. Depending on the local market conditions, owning single-family homes can provide a hedge against inflation. Taken in aggregate, home values in the United States have seen a 4% average annual growth since 1991, as per the Federal Housing Finance Agency. But one must also remember that this data does not factor in maintenance or any other costs.
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