Inflation is considered a “silent tax” that can erode not only savings but also investments. In December 2023, the annual inflation rate in the European Union was 3.4%. Although it was seven points lower than a year earlier, many investors are still seeking alternatives to preserve their purchasing power. In this article, we will explore five investments that protect against inflation, along with their pros and cons.
1. Indexed funds: automatic diversification at low cost
In the short term, an increase in interest rates can lead to a recession. However, stocks are a good hedge against inflation in the long run. However, not all companies are in the same situation. Generally, companies that can raise prices will weather the storm better. How to choose them? The best option for the vast majority is to invest through indexed funds. By investing in an entire index, such as the S&P 500, there is no need to choose. These funds have lower costs and, as they replicate market performance, achieve better results than actively managed funds most of the time.
2. Commodities: diversification into real resources
Alternative investments are a good way to diversify the risk of our portfolio. Generally, when inflation rises, so do commodity prices: why not take advantage of it? We could include precious metals, such as gold, traditionally considered an investment that protects against inflation, in this category. We can invest in these assets directly, through shares of companies exposed to them, or through specialized funds.
3. Monetary funds: liquidity and capital protection
Designed for the very short term, monetary funds invest in fixed-income securities with very short maturities. Their risk is very low, so their return is also limited. However, as it is linked to the evolution of interest rates, it may be sufficient to counteract the effects of inflation. Additionally, they have the advantage of being a highly liquid investment.
4. Cryptocurrencies
In times of high inflation, it is interesting to invest in assets whose value increases with rising prices or is not correlated with them. That’s why cryptocurrencies can be a good addition to our portfolio. Although, given their high volatility, they should occupy, at most, a small percentage of our total investment.
5. Real estate crowdfunding
Real estate tends to withstand inflation well. Its price tends to increase at a faster rate than the CPI in the long term. Additionally, it is common for rents to be indexed to the CPI, effectively protecting against inflation. Crowdfunding brings together the best of both worlds – ownership and rental of real estate – and allows investing with little money. In the case of Urbanitae, from just 500 euros, with typical returns from real estate development.
By diversifying your portfolio with these investments, you will be better positioned to face the challenges that inflation can present. Each option has its own characteristics and risks, so it is essential to adjust your investment strategy according to your goals and risk tolerance. Stay informed and adapt your portfolio as economic conditions evolve to ensure a solid and resilient approach against inflation.
