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Record deficits, massive government money printing, labor shortages, constricted supply chains (think microchips)—add them all altogether and the official explanation that “inflation is transitory” starts to look more like wishful thinking than a legitimately expected outcome.
The most recent numbers make this point. According to official information, the current annualized rate of inflation is running at about 5.3%. If Federal Reserve Chairman Jerome Powell’s assessment of the inflationary outlook is accurate, maybe that’s as high as inflation gets for 2022, and the rate will begin to decline.
But given all the facts above, are you willing to bet your portfolio on that outcome?
If not, here are six ways to hedge against inflation in 2022. It doesn’t mean you have to convert your entire portfolio to inflation-sensitive asset classes. But there is a strong case for adding small positions in several to be prepared, come what may.
We’ll start with food and energy, two products that are often excluded from inflation calculations because of their price volatility. But it’s that volatility that might make them the very best plays in an inflationary environment.
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The energy sector has been a quiet corner of the investment universe since the latest stock market boom began back in 2009. But all that has changed since 2020. After reaching a low of less than $17 per barrel early in 2020, oil is now sitting above $72.
Some of that increase can obviously be attributed to the recovery from a Covid pandemic low at the height of the crisis. But a big part of the increase has taken place in 2022, as the economic impact of the pandemic has declined. Is there a connection between rising oil prices and inflation in 2022?
Some readers may recall the double-digit inflation of the 1970s. That crisis was largely caused by a dramatic increase in the price of oil.
The connection is hardly a coincidence. The economy is heavily dependent on energy, specifically oil. Without it, cars don’t run, aircraft don’t fly, ships don’t sail, and plastic never happened.
It’s not possible to know if rising energy costs are at the heart of higher inflation, or if the opposite is true. But if we have entered a prolonged period of inflation, energy is likely to prove to be one of the best investments possible.
That doesn’t mean you need to begin investing in oil as a commodity. Instead, you can invest in the major oil companies, like Exxon Mobil (XOM)
and Chevron (CVX). Each company has a dividend yield well above 5% and has turned in a healthy price increase since the beginning of the year.
Food is the other historically volatile commodity when it comes to inflation, and there is plenty of evidence that dynamic is already playing out. Not only are prices rising on many food items, but some are even in short supply.
There are different ways to incorporate the food sector in your investment portfolio. Stocks in companies engaged in food production and delivery are certainly one possibility.
But if you’re looking for a more predictable play on food, consider farmland instead.
This is certainly an unusual investment for a typical investor, but that’s exactly what makes it a true hedge.
Consider that a report from Seeking Alpha shows that farmland outperformed virtually all major asset classes between 1972 and 2016:
There’s no need to buy a farm and become a farmer to participate in this sector. Instead, you can invest in farmland through a crowdfunding platform known as AcreTrader.
With as little as $5,000—though some investments require as much as $50,000—you can invest in productive farmland. You’ll buy shares in the company’s interest in specific farm properties. That will enable you to receive revenue from two sources—the net profit from the rent generated by the farm, and the profit on the eventual sale of the investment. The company claims average investment returns of 11% per year.
It’s an illiquid investment that will take several years to pay out. This is why it requires accredited investor status. To participate, you’ll need to be either high income, high net worth, or both. If you qualify, farmland may be one of the very best inflation plays available because it sits at the very front of the global food chain.
House prices have been rising dramatically over the past year is common knowledge. But from an investment standpoint, one of the best real estate plays is commercial real estate. That includes retail space, office buildings, industrial properties, warehouses, and apartment buildings.
It’s a staple investment of the wealthy, and it’s not hard to see why. Not only does it offer the potential for price appreciation, but also the predictability of current income from the rents collected from the properties.
Unfortunately, commercial real estate requires a big investment, one too large for the vast majority of investors. But once again, crowdfunding offers a workaround for this dilemma. You can invest in commercial real estate with no more than a few thousand dollars through real estate crowdfunding platforms.
One popular example is Fundrise. You can invest in portfolio-type investments with as little as $500. And it’s open to both accredited and nonaccredited investors. You’ll have an option of investing in properties for long-term growth, income generation, or a combination of both.
Another real estate crowdfunding platform worth considering is CrowdStreet. This platform is available only for accredited investors and requires a higher minimum initial investment. That investment can range from a low of $25,000 to as much as $250,000.
But if you are an accredited investor, and can fund an investment of that size, CrowdStreet offers three different ways to invest in commercial real estate. That includes investments and individual properties, diversified funds and vehicles, and tailored portfolios that include several investment types.
Without a doubt, fine art is one of the most unusual of all inflation hedges. Yet that’s exactly what it is, and the reason why it’s commonly held by wealthy investors.
While it’s true that fine art is a complete mystery to most investors, it does have a strong inflation protection quality. That’s because each piece of fine arts is unique. It was produced by one of the recognized masters, and the value can increase significantly over time. This is especially true during times of inflation, when more money is chasing select investments rather than flowing into paper investments like stocks and bonds.
Even as a small investor, with no knowledge of the fine art market, you can participate in this asset class. And your investment will be a lot smaller than you may have ever imagined.
A service known as Masterworks enables small investors to invest in fine art. Though they require a minimum investment of $1,000 to participate, you can spread that investment across multiple pieces of art. Masterworks sells shares of artwork for just $20 per share. That means you’ll be able to invest in as many as 50 separate pieces of art with a single investment.
Masterworks specializes in fine art, and they have a deep understanding of this asset class. They purchase artwork based on the historical price performance of similar works by the same artist. They target appreciation rates of between 9% and 15%.
Fine art certainly qualifies as an exotic investment, so you’ll want to limit how much you invest. But a small investment in this asset class could provide outsized returns in an inflationary market.
We almost hesitate to include this asset class on this list, because it’s a recent investment—if it’s even an investment at all. But there’s little doubt cryptocurrency has proven to be one of the top performing investments of the past several years.
How much of that owes to the novelty of the class, its rising popularity, and the impact of inflation is open to debate. But cryptocurrency is coming to be viewed as a potential inflation hedge. Based on price performance in the last few years, it’s hard to argue against that position.
Fundamentally, one of the reasons why crypto could prove to be the best inflation hedge of all is because it represents an alternative currency. Inflation is, after all, excess production of sovereign currencies, lowering their value against real assets.
As an alternative currency, crypto may increase in popularity as traditional currencies continue to devalue. This may at least partially explain the price explosion of Bitcoin and other cryptos since early 2020.
Unfortunately, you won’t be able to buy cryptocurrency through a bank or through most brokerage companies. Instead, you’ll need to purchase it through cryptocurrency exchanges.
Cryptocurrency exchanges are the most common way to buy, hold, exchange, and sell cryptocurrencies. The number of crypto exchanges has increased in recent years, as interest in digital assets has skyrocketed. Two of the most popular are Coinbase and Gemini.
Coinbase has grown to become one of the most popular exchanges available. They offer nearly 70 cryptocurrencies, including the most popular, like Bitcoin and Ethereum. They even enable you to earn additional crypto by participating in what’s known as crypto staking. That’s an activity in which you monitor the block chain of a specific crypto.
Coinbase also offers its own stablecoin. This is a digital currency with a value fixed to the U.S. dollar. The advantage of a stablecoin is that it’s a digital asset that can easily be converted into dollars. They also offer a Visa debit card so you can spend your crypto balance on everyday purchases. And perhaps best of all, you can open an account and begin trading in cryptos with no more than $2.
Gemini works like Coinbase, but it has an advantage that you need in the crypto exchange universe. The platform is regulated by the New York State Department of Financial Services, making Gemini the only crypto exchange in the U.S. to be regulated by a government agency. That status makes the platform subject to capital reserve requirements, compliance standards, and cybersecurity regulations.
Gemini also offers insurance coverage on cryptocurrencies held on the platform. This is provided by a captive insurance company, which will protect your investment if Gemini fails for any reason.
But what might make Gemini most interesting to investors is the ability to earn as much as 7.4% APY on crypto balances. That will provide you with a passive source of income that easily outpaces the current rate of inflation.
Gemini offers trading in over 40 cryptocurrencies, and also offers its own stablecoin—the Gemini dollar. If that’s not enough, there is no minimum dollar amount required to open an account.
At the beginning of this section, I noted that cryptocurrency cannot be bought and sold through most brokerage firms, and that’s true. But there are a couple of exceptions.
Robinhood is an investment app that offers commission-free trading in stocks, options, and exchange traded funds. But they also enable you to buy and sell cryptocurrencies on the app. In fact, they offer seven of the most well-known cryptos, including Bitcoin, Bitcoin Cash, Bitcoin SV, Ethereum, Ethereum Classic, Dogecoin, and Litecoin.
As is the case with other investment securities, Robinhood offers commission-free crypto trades. The one disadvantage is that you can only buy and sell crypto on the platform. You can’t transfer it to another exchange or hold it in a digital wallet.
Robinhood has no minimum investment requirement and the advantage of being able to invest in cryptocurrencies right along with more conventional investments, like stocks and funds.
Webull is another investment app that offers commission-free investing in stocks, options, and exchange traded funds. But they also enable you to invest in eight different cryptocurrencies. And like Robinhood, you can trade cryptos commission free. No minimum amount is necessary to open an account, and you can trade cryptos with as little as $1.
But also like Robinhood, you can only buy and sell cryptos on the platform. There’s no ability to transfer it to another platform, or into a digital wallet.
Despite the limitations Webull and Robinhood have regarding cryptocurrencies, they’re an excellent choice if your preference is only to trade the digital assets. But if you’re looking for other features, like earning interest on your crypto, being able to transfer to other platforms, or accessing the funds with a debit card, crypto exchanges will be the better choice.
This is an asset class all its own, because Yieldstreet offers multiple asset classes that can help you protect your investments from inflation.
Yieldstreet is an alternative investment platform, which has a value because alternative investments often perform best in inflationary environments. That’s because the investments you make on the platform are not closely correlated with traditional asset classes, like stocks and bonds.
Examples include short-term notes, with terms of 3 to 6 months and paying interest higher than certificates of deposit; structured notes that provide both coupon payments and equity downside protection; single asset class offerings, like commercial real estate funding; and a multiple asset class fund (the Yieldstreet Prism Fund) that invests in art, real estate, commercial loans, merchant ships, and even litigation finance.
That will give you an opportunity to spread your alternative portfolio allocation across several asset classes on the same platform.
The platform is open to both accredited and non-accredited investors and will require a minimum investment of between $500 and $15,000.
It’s an excellent opportunity to hold several of the asset classes listed above on the same platform.
Hedging against inflation doesn’t require that you convert your entire portfolio to one that’s likely to benefit from rising prices. Inflation may yet prove to be transitory, in which case you want to continue to hold the majority of your portfolio in traditional assets, like stocks and bonds.
But if you’re concerned that the current surge in inflation is not temporary, carving out a small corner in your portfolio for inflation hedges may be a solid long-term investment strategy.