What is Inflation?
Inflation is the decline of purchasing power of a given currency over time, caused by the increase of prices for goods and services.
What Is an Inflation Hedge?
An investment that is considered to protect the decreased purchasing power of a currency because of the loss of its value due to escalating prices is known as an inflation hedge. It usually is about investing in an asset that is expected to increase or remain stable in its value over a specific duration. Optionally, the hedge could also suggest an investment that takes a higher rank in assets that decrease in value at a lesser speed than the currency value.
Current Dynamics of Economy
The impact of a high inflation rate has made the economy suffer for the last two years. Inflation slowly dilutes the value of money and also the value of accumulated savings.
To build up substantial wealth it is necessary for year-on-year growth in the accumulated savings to be higher than the inflation rate. If the rate of growth is lower than the inflation rates your savings are shrinking as the value of money today will be lower than the start of the year. It will buy fewer goods and services than it could a year ago due to inflation. Therefore, beating inflation is vital for any investor.
Investment Assets Options
To combat inflation, it is important to adjust your investment portfolio sooner than later to minimize the impact. Let’s see how some of the available investment options in the market today perform as a hedge against inflation.
Savings Account
In the current scenario, the rate of interest on saving accounts in banks is much lower than the inflation rate and more so after the taxes are deducted from them.
Stocks, Bonds, and Mutual Funds
Investing in stocks, bonds, and mutual funds is a popular hedge against inflation but when the inflation rate is broken down into its expected and unexpected components, all its positives turn negative for stocks or mutual funds, particularly during unexpected inflation.
Real Estate
Real estate investment has proved to be a safer hedge against inflation time and again due to the stability and appreciation that it offers at all times making it undeniably a better hedge than the other assets.
Why is Real Estate Investment the Best Hedge Against Inflation?
Real estate is a great investment at any time and even better during times of surging inflation. Considering the pros and cons of other investment assets, real estate investment such as exclusive pool villas in Thailand is the best form of hedge during these times.
Let us see some of the top reasons why real estate investment is a better hedge against inflation as compared to other investment assets:
- Real estate holds great value because it is scarce. Limited availability of land and rising population will only increase the demand for housing and therefore real estate has a great potential of easily beating inflation. A good example of scarce real estate property is sea view luxury pool villas Phuket.
- The value of a property increases over a period of time. Tangible assets like real estate appreciate in the long run, which makes buying a property a good way to spend your money during inflationary times.
- Rents will rise with inflation. The rising inflation brings in a rise in all prices including rent prices. Homeowners can escape from mounting rental prices because their cost is fixed, regardless of what’s happening in the market.
- Besides appreciation, real estate investments provide a hedge against inflation through the cash flow and passive income generated from rental income. Smart investments in rental properties such as private pool villas in Thailand not only cover monthly expenses that include the principal loan balance, interest, taxes, and insurance but also generate some monthly income.
In Conclusion
Today’s real estate market is a great example of rapid price appreciation. Even properties that were purchased at the peak of the real estate market, before the Great Recession of 2008, are worth much more now than they were then. Time mitigates the dips if any and facilitates the growth of equity in real estate, thereby making it the best hedge against inflation.
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