AAs global economies continue to grapple with severe inflation, forecasters predict that it will take until spring 2022 at the earliest to see some form of financial recovery. With that in mind, how can you best manage your wealth to ensure that your money retains its value as the costs around you continue to rise?
Understandably, the COVID-19 pandemic has played a critical role in spiking inflation rates in 2021. The unpredictability of consumer behavior following lockdowns and social distancing rules has led to cuts in supply chain and increased demand in various industries that companies have struggled to keep up with.
Such supply shortages, coupled with a lack of available labor, have led the United States to experience its highest inflation rates in 31 years, such as the home consumer price index. jumped to 6.2% in November.
Like the data shows, the inflation problem is not confined to the United States. In Europe, we can see that inflation rates have doubled from their highest level in 2020 to 4%, with the highest inflation rates across the continent expected to rise further in 2022 before recovering in 2023. .
With this in mind, how can you best protect your assets from rising inflation? Let’s take a closer look at some of the most effective places to invest in times of inflation:
Investment in alternative currencies
The most natural hedge against inflation comes in the form of gold and other alternative stores of value. In some developing economies where national currencies have suffered from hyperinflation, gold has generally become much more prevalent along with other common unofficial forms of currency.
However, it should be noted that gold is not a hedge against inflation. This is because when inflation rises, central banks often increase interest rates as part of their monetary policy. When interest rates rise, holding an asset like gold that does not earn a return is unlikely to be as valuable as holding an asset that does.
According to Maxim Manturov, head of investment research at Freedom Finance Europe, many investors have turned to the decentralized world of cryptocurrencies as a way to escape recent increases in the inflation rate.
“Overall, the recent bitcoin rally reflects the coin’s wider use as a hedge against inflation and the availability of huge liquidity in the markets due to low rates and QE,” Manturov explained. “The idea that bitcoin may offer better protection against inflation than gold seems to be gaining traction as silver moves from gold to digital gold.”
Bitcoin and most other cryptocurrencies are built on decentralized digital ledgers. This means that assets are theoretically immune to inflation – although price movements following major events such as the Evergrande crisis in China indicate that the crypto landscape is not fully resilient in a worrying economic context.
Additionally, the extremely volatile nature of cryptocurrency markets means that there is always a danger that your wealth will be much less secure than with any other traditional approach to investing.
The best performing ETFs in times of inflation
Fear of inflation shouldn’t force you to stay away from traditional stocks. Research can certainly be your friend when difficult financial circumstances are numerous, and the S&P 500 offers plenty of opportunities for anti-inflation investing.
“We favor (stocks) in the current environment of economic expansion and rising inflation,” said Chao Ma Wells Fargo’s Global Portfolio and Investment Strategy Group in a report. “They offer the potential for both long-term price appreciation and a desirable level of income.”
Like the data illustrate, many exchange-traded funds behave differently in times of inflation.
According to data from Wells Fargo, the inflationary return on oil is far superior to many other options investors might choose to protect their wealth. With the representative United States Oil Fund (USO) ETF posting a 69.2% return on its price at the start of the year, it’s fair to say that the fund is among the best inflation hedges in the world. investment landscape.
Interestingly, emerging market equities have performed particularly well in the wake of rising inflation. But in ETF terms Offering the best returns in the current financial climate, the IShares Core S&P Small-Cap ETF has generated a 20.4% gain for investors since the start of 2021. Overall, Wells Fargo has identified stocks as small. capitalization as the fourth most efficient asset in which to invest. while inflation continues to rise.
With forecasts predicting that inflation will continue until 2022, it is certainly worth exploring your options in the near term to protect yourself against the loss in the value of your wealth. While buying in other currencies and crypto can present its own volatility issues, there are many ETF options that have already been shown to be inflation resistant. With this in mind, they represent a safe and proven refuge against the loss of the value of your wealth.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
