Before we take up and discuss best inflation hedge let’s understand what actually is an inflation hedge. It is nothing but an investment that protects your investments or portfolio of investments against inflation. The return on this investment increases as the prices of different commodities rise. Thus as the investment value increase with increasing inflation rates the overall return of your portfolio increases.

Gold is one of the most common inflation hedge used since ancient times. Stocks related to the natural resources companies and industries, real estates and investment in different commodities like silver, copper and agricultural product are also used as an inflation hedge.

It is difficult to figure out a best inflation hedge among different options.  But you can decide which one is the best by calculating the real rate of return that the investment gives you in long run. Real rte of return is the actual return which you will get if you deduct the inflation rate for the years of investment. According to me the best one is the investment which can adjust with the rising inflation rates and provides inflation protection feature.

Treasury Inflation Protected Securities
Treasury Inflation Protected Securities or more commonly known as TIPS is one such security that not only give you a fixed interest rate but also a certain percentage over this rate according to the rising Consumer Price Index. They thus adjust according to the inflation every year. But they are complicated securities. Moreover the returns are taxable. So, it is better to consult your financial advisor and buy them through mutual funds to avoid any pitfalls.

Metals
It is also observed that the precious metals like gold, silver and copper do well when the prices are increasing. Metals especially gold fulfills two basic objectives of investment, it gives you the necessary liquidity during the time of financial crisis and it acts as an inflation hedge. It is advisable to invest at least ten percent of your investment in gold.

Real Estate
Other strong contender in this category is the real estate. This too gives you high return when prices of the stocks fall down. You can invest in real estate based securities or directly in real estate. Real estate investments are always a better choice. Investment gives you an ownership of an asset the value of which increases with years.

Bonds
These show an immediate effect of inflation. An increase in the interest makes them a lucrative investment option but in the long run the inflation effects are more pronounced. This is due to their fixed interest nature. The best way out is to invest in bonds with a maturity period of up to five years.

Besides this investing in oil and real estate stocks is also a good choice. The best inflation hedge is one which gives you an optimum real return even with rising inflation rates.

Tags: inflation hedge, Real Estate, Treasury Inflation Protected Securities