As you accumulate assets and investments, it’s absolutely essential to factor in the possibility of inflation. As governments debase their currency around the world, it seems that inflation is a near certainty in the future. Financial freedom requires security and low risk investments, since you will be dependent on these investments for your income. If inflation eats away your returns, you might be back out looking for work.
Traditional Hedges Against Inflation
The most common hedge against inflation is gold and other precious metals. It’s often recommended to have a percentage of your assets allocated to gold. I would recommend anywhere from 5% to 20% depending on your comfort level. Spread your allocation across physical gold, gold ETFs and perhaps some gold miner’s stocks.
Stocks are also a decent hedge against inflation since businesses basically pass on their costs to their customers. Dividend paying companies also tend to increase their dividend with inflation. Companies that provide consumer staples such as basic consumer products, cigarettes, foods, etc. are strong inflation hedge candidates for a long-term time horizon. They will continue to sell their products and increase their pricing in pace with inflation. Note: If a hyper-inflationary scenario arises, stocks will not be as effective as a hedge.
Real Estate is also a potential hedge against inflation; although, it is highly illiquid which can bring about other issues. Also, with the recent boom and bust in the real estate market, the pricing of real estate is tough to get a firm grasp of these days.
Non-Traditional Hedges
Some other options to protect you against inflation might be actual products or goods. Certain goods that have lasting value and are valuable things to own should have their value increase with inflation. Some items that might fall into this category are: firearms, a reliable automobile, generators, etc.
Lastly, you might consider the skills that you possess to be inflation hedges. If you can perform important functions or duties, you will be able to command wages that are in pace with inflation. What should you take from that? Keep your skill set up and if you have additional free time in your financially free lifestyle, consider picking up new skills.
Keep Up With Inflation
Because you will need to keep up with inflation, your overall return on your investments will need to be higher than your withdrawal rate (for income purposes). Your investments will need to continue to grow over time to protect you from inflation; therefore, fixed income isn’t a very good option.
Jump To Another Step In This Guide:
- Step 1 – Assess Your Situation & Set Some Goals
- Step 2 – Get Out Of Debt
- Step 3 – Smart Money Management
- Step 4 – Boost and Diversify Your Income
- Step 5 – Reduce Housing Expenses
- Step 6 – Make Your Money Work For You
- Step 7 – Protect Against Inflation
- Step 8 – Invest In Cash Flowing Assets
- Step 9 – Pursue Complete Independence
- Step 10 – Make Incremental Improvements
