At times like the present having a huge portfolio of stocks can be a stressful experience. The markets for equity have reached new record highs, but the rationale for these elevated price levels appears to be a bit questionable.

Old-timers who managed funds through Black Monday (1987) and the Dot-com bubble (1995-2000) warn of the potential for similar situations today, while at the same time Wall Street encourages retail investors to take on even greater risk.

Famous investors such as Ray Dalio and Mark Mobius have publicly stated that investors must be able to have 5-10% of their investable funds invested by physical Gold. In the Ray Dalio All-weather Portfolio for an illustration, has an 7.5% allocation to Gold.

The highly successful investors are recommending physical Gold as a way to protect themselves against the stock market while also highlighting the danger of currency devaluations aftereffects of massive pandemic-related monetary and fiscal stimulus.

In this brief article we'll discuss various strategies for hedging an Portfolio of Investments against Inflation and stock market risk.

Specifically how to evade against rising cost of living

There are a number of assets that are commonly considered in the category of inflation hedges.

Precious metals (Silver in particular)

Commodities

Real estate investment trusts (REIT)

Treasury Inflation Protected Securities (TIPS)

Like all potential Investments, each class of asset have advantages and disadvantages that an investor must consider.

Precious metals

Holding and purchasing the physical Gold as well as Silver are a well-established strategy for protecting yourself from Inflation. Precious metals can also be an effective method to diversify an investment portfolio and protect against the risk of stock market volatility.

During the Great Inflation of the 1970s (1963 until 1980) Gold rose by 1600 per cent and Silver soared 2700 percent. Investors with a sense of direction could buy Silver for $1.29 and Gold for $35 an ounce by 1963. In 1980 these savvy investors could take profits on their investments at $50 or $800 per an ounce.

The most effective way to invest to invest in Silver as well as Gold is to take personal possession of the Precious metals and store them locally.

It is also possible to gain exposure to the metals using ETFs, Gold Trusts (e.g., GLD) as well as SLV Trusts, Silver Trusts (e.g. SLV), and certificates program (e.g., Perth Mint).

Investors who have retirement savings that are tax-deductible can purchase physical Precious metals using these funds by opening an auto-directed Gold IRA. Tax-free and tax-deferred Retirement accounts can be moved in Gold IRAs.

Commodities

Commodities represent real investments like orange juice or steel rolled. When inflation is high, prices on real goods tend to increase.

From an Investment standpoint, there are two kinds of commodities to know about: hard and soft.

Hard commodities need to be mined or drilled , and this includes precious metals including aluminum, copper crude oil, natural gas and more.

Soft commodities are cultivated in the soil or walk on top of it with four hooves. Corn, wheat live hogs, corn, and feeder cattle are examples of soft commodities.

ETFs enable investors to invest in both soft commodities.

Futures on commodities aren't recommended because of assignment risk. Options on commodity futures are a possible stock market hedge however, they carry the highest risk.

Real estate investment trust (REIT)

REITs are Investment vehicles that have pools of income-producing real Estate. Inflation can push rental rates and property prices higher.

Investors purchase individual shares of REITs to get exposure towards Real Estate without taking on the responsibility of finding or financing the properties themselves.

Residential REITs are specialized in apartments, single-family houses mobile homes, as well as student housing. Commercial REITs are focused on office buildings, retail stores hotels, as well as other forms of business properties that generate income.

A small percentage of REITs concentrate on holding the mortgages (Mortgage REIT) while the majority of REITs focus on the holding of income-generating properties (Equity REIT).

Treasury Inflation Protected Securities (TIPS)

TIPS also known as Treasury Inflation Protected Securities, combine the security of the Treasury bond with the assurance that the buyer will receive their initial Investment back.

The principal value of TIPS bonds is the principal amount. TIPS bond is adjusted in line with that of the CPI (Consumer Price Index) over the duration that the bond is in force. The annual coupon payment is based on the current principal amount of the bond so the investor gets an Inflation-adjusted payout for their TIPS.

For an illustration, imagine an investor who owns one year's worth of TIPS with a 1% coupon rate. If Inflation (as measured using the CPI) is 4.4% The $15,000 worth of bonds is adjusted upwards to $15,600. The bond's coupon payment is then calculated on the adjusted value of the principal so the buyer receives $156 in interest for the duration of the year.

Note that the original investment (the primary of the bond) is adjusted to reflect inflation in this example but the investor has locked themselves into a 1% interest rate instrument in an environment where higher coupon rates are likely to be in the future.

For risk-averse investors the lower yield from TIPS may be acceptable in exchange for the perceived safety of the US Treasury bond.

Specifically how to sidestep versus rising prices

We have to be careful when we start talking about the best of anything in the investing world. The best hedge against Inflation is likely to be different for a 25-year old than for a 65-year old.

An investor's tolerance for risk also affects what their ideal Inflation hedge will look like. A risk-averse investor may avoid commodities because of volatility while the risk-tolerant investor loads up on physical Silver and shares of energy ETFs.

Why is Gold a hedge in contrast to rising cost of living

Gold is regarded as a hedge against Inflation due to the fact that the cost of Gold tends to increase as the purchasing ability of the currency which the metal is valued decreases.

The price of the gentleman’s suit is used to illustrate an example of Gold being used as a hedge against Inflation.

In 1922, a tailor-made wool suit (a tailor-made suit) and an additional pair of pants cost around $25 US Dollars and Gold was priced at $20.67 per one ounce.

Fast-forward to today and similar manaEUR(tm)s suit is priced between $1500 and $2000 with Gold selling for about 1800 dollars an ounce.

This is 100 years in which just one ounce Gold has protected its owner from the ravages of Inflation.

Exactly how to buy Gold

There are many options to invest in Gold. As we have already mentioned, the ideal Gold Investment involves purchasing the physical metal and then storing it somewhere that you have ready access to it.

After that foundation is laid There are a variety of ways to invest in Gold:

Physical Gold Trusts and ETFs (e.g., Sprott Physical Gold Trust PHYS, or GLD)

Mining shares, warrants and options

Self-directed Precious Metals Irrevocable savings accounts (Gold IRAs)

Gold futures

Optional options https://sites.google.com/view/registeredinvestmentadvisor/precious-metals on Gold futures

Physical Gold Trust

It is true that the Physical Gold Trusts such as GLD (SPDR Gold Shares Trust) are deceptive because they give investors the illusion of owning physical Gold when all the investors actually own are shares in a securities which is (supposedly) connected in some way in some way to the physical Gold.

It is important to recognize that these Gold Trusts are securities, not Gold itself. They are derivatives of physical Gold but they do not offer an investor any ownership stake in actual metal.

The Gold Trust shares are supposedly redeemable for physical metal but only investors with a good financial position have the ability to do so.

The Sprott Physical Gold Trust (PHYS) requires investors to redeem shares in 400 oz increments. With gold at around $1780 an ounce, that implies that an investor will require $712,000 worth of PHYS before it's possible to get the actual metal.

GLD which is GLD, the SPDR Gold Shares Trust, has an even more stringent threshold for receiving physical Gold.

Investors who are qualified can redeem 100,000 shares of GLD at a time and request delivery of Gold in physical form. At today’s rate (01/07/2022) that equates to an investment of about $16.8 million US dollars.

Self-directed Precious metals IRA

Precious metals IRAs offer investors a way to create a Gold hedge in the stock market using the tax-advantaged retirement money.

If an investor is prepared to pay the penalty of 10% for premature withdrawals of their tax-deferred , tax-exempt funds (401K, 403b, traditional IRA or traditional IRA, etc. ), the money is effectively locked up in some form of IRS-approved Investment vehicle until the age of 59 and 1/2 .

Gold IRAs fall in this category of approved Investments and permit investors to enjoy the protection and security of physical Gold ownership, without paying taxes or penalties as part of the process.

Verdicts

In this short piece, we've talked primarily about using Gold to protect against stock market risk caused by Inflation.

Stock Portfolios are subject to a variety of other risks, including Inflation. There is the risk of equity, liquidity risk, and currency risk that investors have to be aware of and, possibly, protect themselves against.

Luckily, Gold is able