Is it considered a normal day if we don’t see the word ‘inflation’, and its effects of it, plastered all over our social media and news outlets? From the rising costs of a gallon of gas to your usual grocery shop, inflation is through the roof. As a result, consumer behavior is shifting right before our eyes, and the average investor is now scrambling for safer assets.
Speaking of which, what are the billionaires doing? Well, in March of this year, Elon Musk tweeted his advice on hedging against soaring inflation. So, for both seasoned and aspiring investors, if you’re looking for an inflation-proof strategy from none other than the world’s richest man, then keep reading.
The Inflation Situation
Inflation is becoming a global problem, so there’s a good chance you’re dealing with the repercussions in some way or form. For some context, inflation in the UAE is estimated to be at 3.7%, whereas the annual inflation rate in the US unexpectedly accelerated to 8.6% in May of 2022.
The recent global events, exacerbated by the Russian-Ukraine conflict and the still-recovering post-pandemic economy alone, among other things, show that inflation may be here with us a lot longer than anticipated, much like a guest who has overstayed their welcome. Indeed, these global events have had a significant influence on long-term investments, our savings, and the average cost of living worldwide.
Essentially, as inflation soars, it whittles away at the purchasing power of a currency, meaning a dollar today won’t be of the same value 5 years from now. So, if a dollar is worth less, then assets valued in dollars could lose their value. That’s why, naturally, investors are now on the lookout for assets that will maintain their value best. So, what did Elon have to say about this ‘inflation situation’?
Now, the important point to take away from Musk’s message here is that physical assets are generally the safest investment during times of high inflation. Why is that? Well, physical assets represent a safe haven during times of uncertainty, as their underlying value is connected to the fact that they’re, well, a physical thing. Generally speaking, tangible assets that are both scarce and desirable make for better investment options in times of inflation.
That said, shielding investments from raging inflation appears to be a daunting challenge for many investors. But remember, inflation doesn’t always have a negative impact on assets and, in fact, many assets tend to perform well during periods of high inflation.
So, here are three physical assets that are sure to inflation-proof your portfolio – the Elon Musk way:
Real estate is known to be a strong hedge against inflation. And we’re not just saying that because we happen to be a real estate investing platform. We’ve heard it from the millionaires, the billionaires, heck, even the man, Elon Musk, himself typed it out with his own two thumbs for the whole world to see.
Real estate is an asset class that historically performs well and yields healthy returns during periods of high inflation. This has traditionally worked to a long-term real estate investor’s advantage because properties typically rise in value and rent, alongside the Consumer Price Index (CPI).
What also sets real estate investments apart from other options is that they provide more steady passive income returns and capital appreciation from the assets. What’s also great is that by investing in several properties, investors have the potential to build wealth via multiple income streams during an inflationary period.
Now, we know that running around to buy a rental property may not be the ideal option for most investors right now, but luckily for you, there are options available to invest in properties through fractional ownership. Investors can own shares in rental properties from as little as AED 500 on real estate investing platforms like SmartCrowd.
Should you go for the gold? The answer is a resounding yes! Gold, the pinnacle of precious metals, has long been considered a hedge against inflation, as gold is a physical commodity that tends to hold its value as it isn’t correlated with paper money. Silver is also another precious metal that holds significant industrial value as it is a critical component in electronics and technology products.
Again, these commodities are scarce, as the global supply of precious metals is limited since there is a finite amount of metals on earth, like gold, silver, and platinum. So, as investors flock to precious metals when inflation revs up, this demand in itself boosts precious metal prices, giving investors a decent hedge against inflation.
As far as investors are concerned, instead of storing your wealth in gold in its physical form (jewelry, bullions, or coins), you can also invest in gold and silver exchange-traded funds (ETFs), or buy gold and silver mining stocks.
Now, commodities cover a wide range of assets that include the precious metals we discussed above, but also tradable raw materials and agricultural products that are bought and sold like oil, gas, grains, and spices, for example. Generally, commodities tend to respond well during inflationary periods as their prices not only increase with inflation, but the prices themselves can also intensify inflationary pressures and act as indicators for economic growth.
During periods of economic growth, the demand for commodities surges, bumping their prices higher. For example, as inflation increases the price of oil, the price of petrol or gasoline also rises accordingly.
That’s why investors see value in owning and trading physical, tradable commodities since consumers need them in their day-to-day life. You can invest in commodities in the form of futures contracts or buy them indirectly through ETFs, commodity mutual funds, or stocks. However, one must remain prudent when trading commodities, as they are based on demand and supply, so even a minor shift in supply due to global events or geopolitical tensions can negatively impact pricing.
So, do you agree with Elon Musk? Not to be biased or anything, but we think he makes a sound point! Musk is right in saying that owning physical assets is the way forward during inflation, and that’s why it’s more important than ever for investors to consider diversifying their portfolios with physical assets. Inflation is hitting the economy pretty hard now, and some industries are definitely feeling it more than others, so it’s crucial to know your inflation-proof stuff.
All in all, if billionaires can expand and optimize their portfolios to include lower-risk assets during high inflation, then so can you! Though not all of us share the same concerns as the typical billionaire, we could learn a thing or two from their investing strategies. So, from snapping up prime properties to glistening in gold and silver jewels, rest assured that the above assets will help you hedge your portfolio against inflation.
At SmartCrowd, we encourage investors to diversify their portfolios as a number 1 smart investment strategy, for a diversified investment portfolio is key to hedging against inflation. Meaning, that even if one area takes the plunge, another sector may very well benefit under inflationary pressures, so it always works in your favor to spread your portfolio risk. That’s why you should consider a combination of investments to provide a potential return that can keep pace with the effects of inflation.
Disclaimer: This blog is intended solely for educational purposes and shouldn’t be treated as financial advice. We suggest you always conduct thorough research, perform your own due diligence and consult with financial advisors to assess any real estate property against your own financial goals.