With record-setting inflation rates and a volatile stock market, you may be looking for alternative ways to preserve and grow your retirement savings. Within any portfolio, hedging against inflation involves a few straightforward principles. First, look for investments that do not correlate (move in the same direction) with your assets. If your portfolio goes down, your non-correlated investments will likely go up. Next, look for investments with a heavy proportion of intrinsic value that isn’t as much influenced by the market’s behavior. Consider investments where you believe money must be spent, like infrastructure and commodities.
As we dive deeper into three inflation-friendly investments held outside of the stock market, keep in mind investors can leverage tax-advantaged accounts like self-directed IRAs (SDIRAs) to hold these investments and maximize a retirement portfolio diversification strategy.
1. Real Estate
Real estate is a traditional hedge against inflation because it has tremendous intrinsic value as a tangible holding of limited supply. Tangible assets like real estate tend to maintain or increase in value over time, and spike during inflationary periods, making this an asset that should not be overlooked.
While the single-family market experienced a mass migration of people fleeing cities for suburbs and rural towns during the summer of 2020—no doubt a Covid -19 catalyzed housing boom—there are plenty of opportunities around. Demand for homes is outpacing supply and virtual shopping, e-commerce, and supply chain issues are still driving the demand for diverse industrial growth. SDIRAs holding assets such as REITS, warehouses, and/or raw land outside of the stock market offer significant tax advantages or tax-deferred growth (or tax-free if held in a Roth IRA) and profits that can create cash flow and potential upside for long-term market appreciation.
2. Private Equity – Infrastructure-Focused
The country’s infrastructure is somewhat of a never-ending operation, from general wear-and-tear to developments and renovations to restoring damage caused by natural disasters. We are currently in a phase of heavy development and renovation, and these infrastructure projects need funding – an investor’s options are many. Infrastructure-focused private equity investments raise capital outside of the stock market from Limited Partners (outside investors), then use that capital to invest in additional assets or operations. They resemble traditional private equity investments, but these investments include a focus on utilities, transportation, social infrastructure (hospitals, schools), and energy. Infrastructure investments typically have relatively low volatility and low correlation with other asset classes; spending is often obligatory for these projects, which makes them a popular choice in the alternative asset marketplace to help hedge against inflation.
Commodities are resources that typically get consumed and include semi-precious metals like copper and futures contracts. Assets like these are also found outside the stock market, but there are a few key points to be aware of when investing.
Copper is a cyclical asset, meaning it moves along with the market. It’s also important to remember that, like any tangible asset, the value is dependent on the amount of supply available; this means that issues in the mining process or overall supply chain can affect your investment. Copper is expected to grow as much as 50% over the next 20 years, according to the International Copper Association,. The World Bank’s 2017 report “The Growing Role of Minerals and Metals for a Low Carbon Future” identified metals that would be in high demand in order to realize a low/zero-carbon future. Copper, cobalt, iron ore, lead lithium nickel manganese, platinum metals, and rare earth metals were all identified as essential for developing a “carbon-constrained future.” The report also stated that we could see a rapid rise in demand for metals as global economies look to transition to a lower carbon footprint by 2050.
Futures contracts are another alternative investment option within the commodities asset class. These contracts include physical commodities and financial instruments which detail the quantity of the underlying asset and are standardized to facilitate trading on the futures exchange. The contract obligates parties to buy or sell an asset at a predetermined future date and price. The futures markets were designed for the purpose of hedging. Farmers could protect their crop prices by selling in the futures markets, processors could protect their supply prices by buying. You can do the same thing: if you have an extensive stock portfolio, you can use stock index futures to hedge against a loss in your position. Selling a futures contract at the price you need to protect your portfolio sets it up so that the transaction cost acts as an insurance premium if the price does not go your way. If the market does go where you feared, you will make up the loss on the futures contract that is opposite to your holding. Futures tend to have a higher risk factor than other alternative investments and the details of the contracts can be complex. It is important to fully understand the futures market and the terms of the futures contract—including the fine print.
Evergreen Principles of Hedging
The successes found in alternatives are based on identifying and capitalizing on opportunities in changing—and often challenging—times. Alternative assets that do not correlate with the stock market are tangible, offer intrinsic value, and can retain their value because obligatory spending is an evergreen principle to hedging your portfolio against inflation and the volatility of the stock market.
SDIRAs and Tax-Advantaged Investing
Leveraging an SDIRA to hold alternative assets offers expanded tax benefits that can fuel your retirement portfolio well into the future. As with any investment decision, due diligence and working with a financial advisor are important. Before making an investment decision in a new market, talk to a tax, legal, or financial advisor about your specific situation and see if alternative investments held in a self-directed IRA is the right fit for your retirement goals.
The information provided in this article is educational content and not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.