At times like the present having a huge portfolio of stocks can be a stressful experience. The markets for equity have been making new all-time highs but the economic justification for these elevated price levels appears to be a bit questionable.
Old-timers who managed money during Black Monday (1987) and the Dot-com bubble (1995-2000) warn of the potential for similar events 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 percent of their investment funds invested by physical Gold. In the Ray Dalio All Weather Portfolio, as an example, includes the 7.5 percent allocation to Gold.
These highly successful investors are suggesting physical Gold as a way to protect themselves against the stock market while noting the possibility of currency devaluations in the aftermath of massive pandemic-related monetary and fiscal stimulus.
In this brief article we'll explore different strategies for protecting an investment portfolio against stock market and Inflation risk.
Exactly how to sidestep against rising prices
There are a number of items that are often referred to as in the category of inflation hedges.
Precious metals (Silver in particular)
Real estate investment trusts (REIT)
Treasury Inflation Protected Securities (TIPS)
Like all potential Investments, each one of the asset types comes with pluses and minuses that an investor must consider.
Holding and purchasing the physical Gold or Silver can be a time-tested strategy for hedging against Inflation. Precious metals can also be a good way to diversify an investment portfolio and protect against the risk of stock market volatility.
In the Great Inflation of the 1970s (1963 until 1980) Gold gained 1600 percent and Silver soared 2700%. Investors with foresight could purchase Silver for $1.29 as well as gold for 35 cents an one ounce as of 1963. In 1980 , the smart investors could earn a profit on their investments of $50 and $800 per an ounce.
The most effective way to invest in Silver or Gold is to take personal possession of those Precious metals and keep them in a local storage facility.
You can also be exposed to the metals through ETFs or Gold Trusts (e.g. GLD, GLD) and silver Trusts (e.g. SLV) and certificate programmes (e.g., Perth Mint).
Investors who have tax-advantaged retirement savings can buy physical Precious metals using those funds through the creation of a self-directed Gold IRA. Both tax-exempt and tax deferred retirement accounts can be converted to Gold IRAs.
Commodities represent real investments, such as orange juice and steel that is rolled. When inflation is high, prices on real goods tend to increase.
From an Investment standpoint, there are two categories of commodities to be aware of: hard and soft.
Hard commodities must be mined or drilled , and this category includes the Precious metals, copper, aluminum natural gas, crude oil, etc.
Soft commodities grow in the soil or walk over it with four hooves. Corn, wheat live hogs, corn, and feeder cattle are examples of soft commodities.
ETFs make it easy to invest in both hard and soft commodities.
Futures on commodities are not advised because of the assignment risk. Options on commodity futures are an opportunity to hedge stock prices however, they carry a high level of risk.
Real estate investment trust (REIT)
REITs are investment vehicles that manage the funds to produce income from real Estate. Inflation tends to push both rental rates and property prices up.
Investors purchase individual shares of a REIT to gain exposure the Real Estate without taking on the responsibility of finding or financing the properties them.
Residential REITs specialize in apartments, single-family houses mobile homes, as well as student housing. Commercial REITs are focused on office buildings, retail stores, hotels, and other types of income-producing business property.
A small proportion of REITs concentrate on the holding of the mortgages (Mortgage REIT) while the majority of REITs focus on holding properties that generate income (Equity REIT).
Treasury Inflation Protected Securities (TIPS)
TIPS also known as Treasury Inflation Protected Securities, combine the security of the Treasury bond with a guarantee that the purchaser will receive their initial Investment back.
The principal value of a TIPS bond is adjusted to match to the CPI (Consumer Price Index) over the duration of the bonds. Annual coupon payments are based on the current principal value of the bond so the investor receives an inflation-adjusted payment for their TIPS.
As an example, consider an investor who owns $15,000 worth of 5-year TIPS paying a 1% coupon rate. If inflation (as measured through the CPI) is 4percent then the value of the bonds are adjusted upwards to $15,600. The bond's coupon payment is then calculated on the adjusted value of the principal so the investor receives $156 interest for the duration of the year.
Note that the original investment (the principle of the bond) is being adjusted for inflation in this example but the investor is locked in a 1% interest rate in an environment that has higher rates of coupon likely to be available.
For those who are wary of risk, the lower yield from TIPS could be acceptable for the perceived safety of the US Treasury bond.
The way in which 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 quibble contrary to rising cost of living
Gold is seen as a hedge against Inflation because the price of Gold tends to increase as the purchasing ability of the currency which the metal is valued diminishes.
The cost of the gentleman’s suit is used to illustrate the most classic illustration of Gold acting as an insurance against Inflation.
In 1922 a hand-tailored wool suit (a aEURoebespokeaEUR suit) and an additional pair of pants cost about $25 US Dollars. Gold was priced at $20.67 per an ounce.
Fast forward to the present and similar manaEUR(tm)s suit will cost between $1500 and $2000. Gold being sold for around 1800 dollars an ounce.
It's been 100 years since one ounce of Gold has shielded its owner from the ravages of Inflation.
Just how to buy Gold
There are many ways for you to make an investment in Gold. As already stated the best Gold Investment involves purchasing the physical metal and storing it somewhere that you have the ability to access it.
Once the foundation is set, there are numerous methods to make investments in Gold:
Physical Gold https://eduardonhiv755.de.tl/10-Compelling-Reasons-Why-You-Need-Gold-as-a-Hedge-Against-Stock-Market.htm Trusts and ETFs (e.g., Sprott Physical Gold Trust PHYS, or GLD)
Mining stocks, warrants, and options
Self-directed Precious Metals IRAs (Gold IRAs)
The options available on Gold futures
Physical Gold Trust
These Physical Gold Trusts, such as GLD (SPDR Gold Shares Trust) are misleading since they offer investors the illusion that they own physical Gold however all the investors actually own is shares of an investment that is (supposedly) connected in some manner to physical Gold.
It is crucial to understand that these Gold Trusts are not actually securities, they are Gold itself. They are derivatives of physical Gold but they do not offer an buyer any ownership interest in actual metal.
Gold Trust shares can supposedly be redeemed for physical metal but only well-funded investors can redeem them.
The Sprott Physical Gold Trust (PHYS) demands that investors redeem shares in 400 oz increments. With gold at around $1780 an ounce that means an investor needs seventy-one thousand dollars of PHYS to ensure it's possible to take delivery of actual metal.
GLD, the SPDR Gold Shares Trust, has an an even greater threshold for taking delivery of physical Gold.
Qualified investors can redeem up to 100,000 GLD shares at any given date and time, and can request delivery of Gold in physical form. at today’s rate (01/07/2022) this amounts to an investment of about $16.8 million US Dollars.
Self-directed Precious metals IRA
Precious metals IRAs give investors the opportunity to establish a Gold hedge in the stock market using the tax-advantaged retirement money.
Unless an investor is prepared to pay the penalty of 10% for the early withdraw of their tax-deferred and tax-exempt funds (401K, 403b Traditional IRA, etc. ) The funds are effectively locked up in some form of IRS-approved Investment vehicle until the age of 59 1/2 .
Gold IRAs fall into the category of Investments that are approved and offer investors the security and protection of physical Gold ownership without having to pay any tax or penalties in the process.
In this article, we've discussed primarily the use of Gold to hedge against stock market risk due to Inflation.
Stock Portfolios can be subject to several other risks besides inflation. There is a risk of equity, liquidity risk, and currency risk that investors need to be aware of, and possibly, protect themselves against.
Luckily, Gold is able to hedge against these risks as well. Portfolio performance studies show that even a small amount of Gold will improve the