Inflation is the enemy of any well-balanced portfolio: it eats away at overall value, coincides with broader market volatility, and diminishes consumers’ purchasing power—which can lead to less economic growth. Even if your portfolio shows positive growth, inflation eats away at the actual value of your holdings.
There are several tried-and-true strategies for hedging against inflation in your portfolio. They are not, however, made equally. Some may still feel the pain that comes from inflation, while others might be prohibitively expensive or crowded with other investors with the same idea as yours.
That means finding a unique investment opportunity is crucial—and using farmland to hedge against inflation may be just the strategy your portfolio needs.
This article is a guest post from FarmTogether.
Inflation impacts every asset class differently. Some holdings suffer worse than others; others may end up even gaining value as a result. Every financial scenario is different, just as every portfolio is unique, but there are general patterns that emerge when inflation is on the rise.
Stock performance is mixed during periods of increasing inflation. Value stocks (those that trade below the average stock price of the S&P 500) typically perform well when inflation is high. Investors look toward these stocks for faster gains, as they tend to offer yield earlier than growth stocks.
On the other hand, growth stocks tend to do poorly when inflation is on the menu, as they require investors to hold onto them longer before they reap financial rewards. This means their eventual gains are offset by the weakened value of the dollar, leaving investors with less bang for their buck.
Bonds also tend to perform poorly during periods of inflation. Bonds offer a set return over a set period of time—this doesn’t bode well with inflation’s effect on the value of a dollar. A bond’s payoff ends up having less purchasing power even if the actual dollar amount remains the same when the principal comes due.
Mutual funds and index funds vary in terms of how inflation affects their returns. Funds tied to stock performance tend to beat inflation, while those that are in the bond market tend to perform poorly.
For extra protection against inflation, most investors seek out opportunities in the alternative investing space. These kinds of investments aren’t tied to the ebbs and flows of the stock market, which means they have unique advantages in terms of growth and value when Wall Street is in a volatile phase.
Farmland investing is one such alternative investment option. With farmland investing, people are able to invest their money in a set of real estate opportunities tied to agriculture. Since the price of goods tends to either increase or stay flat during inflationary periods, investing in farmland can help hedge against inflation by retaining value.
Other alternative investments also offer their own benefits and drawbacks with regard to hedging against inflation.
Gold is one of the most popular options as well as real estate, commodities, and participation in real estate investment trusts (REITs). The protection against inflation each of these opportunities offers is different, and the prospect of turning a profit varies as well.
When economies are shaky, gold has historically been the go-to for most investors.
This also means that owning gold within your portfolio is an expensive proposition. You won’t be able to stretch your dollar by going for gold as a hedge against inflation, and you may not stand to make much of a return depending on how much the price of gold increases.
This depends largely on how long you intend to hold onto gold in your portfolio. Short-term gains are hard to come by, but long positions on gold can reap dividends.
Commodities like grains, oil, or livestock can also serve as a great hedge against inflation as they tend to increase in value during these periods.
As with gold, commodities are a stand-in for physically owning the commodity in your portfolio, be it coffee or pork bellies. Since the need for these staples of daily life stays constant irrespective of the flows of the stock market, these investments retain value well in almost any situation.
Both real estate and REITs are also common hedges against inflation, predicated on the value of land and property holding up despite market fluctuations. Moving assets into real estate can help provide coverage against rising inflation because of how well it tends to retain value in any market.
When held for the long haul, real estate can pay dividends; in the short-term, many real estate opportunities can at least hold their value in a manner that beats out stock holdings.
Direct real estate ownership can take several forms: for example, you can own a specific piece of land or a property, opting to either rent it out or eventually sell it. The same holds true for commercial real estate as well. This can be a bit more of a challenge than ownership through a REIT, as you’re directly responsible for upkeep and have to also wrap up a significant amount of money into a singular holding.
REITs, on the other hand, avail you to a wider array of property holdings and may cost less than outright ownership of land or property.
With REITs, investors get a portion of the profit made from rentals or sales corresponding to the percentage of ownership they have in the trust. This option can help you hedge against inflation without taking on the risk of buying a single (or several) properties on your own.
You’ll give up a significant amount of profit in exchange, however, as you’ll split earnings across other investors (as well as the REITs management fees).
There are plenty of options out there to help hedge against inflation—be it through commodities, real estate, bonds, or even vintage bottles of wine. Not every inflation-resistant investment is right for your portfolio, however. Each of these investment types come at a premium, and some are more pricey than others.
Protection against inflation doesn’t have to come at a premium, however.
Farmland investing through FarmTogether can add a resilient holding into your investment mix for as little as $10,000 to get started. Plus, farmland investing does more than merely hold onto your assets to ride out inflation: this opportunity can also offer steady dividends in an economic sector that never goes out of fashion.