As an investor, the number one priority that we have is to minimize risk at all cost. Some of the greatest investors of our time are obsessed with this notion and for good reason. The more they focus on minimizing the chances of losing money, the more they maximize their chances of turning a profit.
Ray Dalio, billionaire investor and owner of Bridgewater Associates discusses that the secret to his success comes from creating something he calls an “All Weather Portfolio”. This portfolio allows him to hedge against all conditions in the market. While this may sound difficult or too good to be true, all this portfolio consists of is a healthy understanding of your risk tolerance as well as knowing which investments can protect you.
How exactly can you begin to create an “All Weather Portfolio” like Ray Dalio and so many other successful investors? Beginning to look into inflation and how to hedge against it is an essential topic to understand when minimizing the turbulence of a volatile market.
In this article, I will give you four essential investments which will help you create a strong structural foundation for your portfolio to begin to hedge against inflation.
1.Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities or (TIPS) are an essential piece in my portfolio. Imagine an investment which actually PAYS you when inflation begins to occur. To add, this investment will never depreciate lower than what you initially payed for it. It almost sounds too good to be true but it is exactly what you get when you purchase (TIPS).
(TIPS) work in an interesting way because they have the capability to make you money in two different ways. First of all they pay you interest depending on the current interest rates of the US economy. If you were to purchase (TIPS) at a time when the economy was experiencing lower inflation rates, you would experience gains once inflation rates inevitably rise.
Now these gains aren’t the most profitable investment you could own but it is one of the SAFEST. By putting a percentage of your earnings into (TIPS) you have effectively stored away your money for your future self as well as enjoyed some earnings while you were at it.
The second way that (TIPS) can make you money is that the actual value of the bond itself rises as it adjusts the the current inflation rate. This means that by the time that the bond matures, if you were reinvesting the interest that you earned from inflation, you should experience some substantial gain when all is said and done.
If you are someone who knows that you don’t want to be stressed about your money and you want a safe place to put it, I would highly recommend looking into (TIPS). Being real with yourself and understanding your risk tolerance is an important part of being a successful investor.
2.Real Estate Investment Trusts (REITs)
As most of the greatest financial gurus of our time have preached, real estate is KING. In a highly inflated market, real estate is one of the best investments that you could possibly have in your portfolio. Because I realize that investing in real estate is not necessarily within everyone’s grasp, there is an even easier form of investing in real estate which is accessible even to the novice investor.
Real Estate Investment Trusts or (REITs) is a form of investing which allows you to invest in real estate through the stock market. (REITs) usually perform really well in an inflated market and prove to pay back substantially in dividends.
There are many forms of REITs, all which involve a different sector of the real estate market. The possible sectors you can invest in when researching (REITs) include but are not limited to…
- Health Care
While these are not the only (REITs) available to you for investing, these are just a couple examples of how you can begin investing in real estate TODAY. By investing in (REITs) like these, your dividends earned are exactly like owning the property itself and collecting rent, just on a smaller scale.
For someone who has a little more risk tolerance but requires some safety as well, (REITs) are an effective way to balance your portfolio while earning large dividends.
This is by far the riskiest investment of the list but also the most lucrative. Earlier in this post, I relayed that as an investor it is important to understand your risk tolerance before proceeding with an investment. This is especially true for investing in cryptocurrency.
Cryptocurrency has become a new and exciting way to hedge your portfolio against inflation. While cryptocurrency can be extremely volatile, there is no real evidence suggesting a link to the stock market and the crypto market. Because of that, investing in something which is completely dependent upon itself is something that could become a good way to hedge against inflation.
When considering a cryptocurrency like Bitcoin which has a limited amount that can be circulated within the economy, Bitcoin has a lot of comparisons to that of gold. The limitedness of this investment provides REAL VALUE behind the currency as many around the world are beginning to accept cryptocurrency as a form of payment.
While it can be intimidating to delve into turbulent markets, there are ways that you can stabilize your portfolio, should you have a lower risk tolerance. If you have the necessary equipment, mining cryptocurrency allows you to invest in crypto without having to put one dime of your own cash into the actual market itself. Yes there will be some costs associated with having the equipment needed for it, but that equipment itself proves to be a lucrative investment due to the current global tech shortages.
Keeping in mind that this investment is extremely volatile, if you are someone who wants to have an investment unattached to one currency or market, Bitcoin is a phenomenal way to hedge against inflation.
“Tangible Assets” is an extremely broad topic to put on this list but it covers some of the most fundamentally important investments to add to your portfolio. While we as investors hope that the economy will perform in the way it should, there is always the slight chance that it could all come crashing down. Because hedging is all about limiting risk, it is important to realize that tangible assets can be the strongest thing that you own.
Some tangible assets to consider investing in to hedge against an inflated market consist of…
- Real Estate
- Precious Metals (Gold, Silver, Copper)
In an economy where prices begin to rise, people have less confidence in the integrity of the economy. Because of this, consumers begin to place more value on investments which are TANGIBLE meaning you are able to see, hold, and feel them.
For example, owning a home in an inflated market will more than likely raise the overall evaluation of your home. Sometimes it will be so dramatic that your private equity will experience a large increase. While these investments aren’t liquid, they still provide valuable worth to your portfolio should you decide to sell.
Tangible assets are a great place to invest your money if you are to purchase them within a deflated market. Realizing when a market is deflated is crucial to attaining the correct prices needed when inflation inevitably occurs once again.
To summarize: Four investments which will protect your portfolio against inflation Include…
- Treasury Inflation-Protected Securities (TIPS)
- Real Estate Investment Trusts (REITs)
- Tangible Assets
While there are many other ways to hedge against inflation, these are a couple of ways which have proven to be wise additions to any portfolio. Each investment varies dramatically regarding risk and reward so understanding your risk tolerance in crucial when making your decisions. Like many of the most successful investors of our time, focussing on minimizing risk can help protect our portfolios when the economy becomes turbulent.
If you have any questions or have any input regarding this topic, don’t hesitate to reach out! I am always eager to interact with you the reader!
Andrew Martinez, owner and writer of Minerva Money
YouTube: Andrew Martinez
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