10 Alternative Investments to Protect Against Inflation

Inflation, according to the personal consumption expenditures index, just logged its largest increase since 1982. That means your cash is losing purchasing power.

Rising prices can affect the value of other assets, too. Stocks, for example, tend to lag in inflationary times as businesses grapple with higher input costs and borrowing rates.

Fortunately, there are alternative assets that can hold up better than stocks when inflation sets in. Keep reading to learn about 10 inflation-hedging investment types that could complement your traditional portfolio. The last one will surprise you!

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Real estate is a classic inflation hedge. Investors love that property values and rents tend to rise along with prices.

Even better, you can finance investment property with a fixed-rate loan. So while the property appreciates and income potential rises, your largest expense, the mortgage, holds steady.

The downside of owning property is that there's work involved. As property owner, you are also landlord, rent collector, emergency contact for late-night plumbing disasters, and maintenance worker.

ALSO READ: The Basics of Investing in Real Estate

You can get the benefits of real estate ownership without the work by purchasing shares of publicly traded real estate investment trusts (REITs). Equity REITs own and manage real estate. (There are also mortgage REITs, which finance property loans.)

By purchasing REIT shares, you become part owner in a diversified portfolio of rent-generating properties. The immediate diversification is an advantage over owning, say, one rental. Exchange-traded REITs are also more liquid than real property. You can often sell your shares immediately if you need to.

REITs are required by law to distribute 90% of their taxable income to shareholders. So you'll earn dividends on your investment, too.

Note that REITs are more volatile than real property. REIT values can get pulled down by broader stock market trends, while real property values typically do not.

Commodities are raw materials and agricultural products like grains, lumber, livestock, energy, and metals. They're commonly used as inputs to make other goods. Grains, for example, are used to produce breads, pastas, beer, and whiskey, among other things.

Commodities perform well when prices rise. Recent research from financial company Vanguard concludes that a 1% unexpected increase in inflation would prompt a 7% to 9% value increase for commodities. So commodities can potentially outpace inflation and offset some declines you might see in other investments.

You can invest in commodities by purchasing the stock of commodity producers. Or you can buy into a commodity fund or exchange-traded fund (ETF).

ALSO READ: Want to Invest in Commodities? Here Are 4 Smart Choices

A farmland investment blends the behaviors of real estate and commodities. Farmland appreciates as any plot of land would. That appreciation does not correlate to the stock market, meaning that stock prices can drop without effect on land values.

Also, the income potential of farmland increases as commodity prices rise -- which happens during inflationary cycles.

If you know how to evaluate farmland, you can buy property directly. But you might prefer a farmland REIT or an agricultural ETF.

Timberland, like farmland, grows in value over time, with little correlation to the stock market. That value growth is magnified because the crop -- trees -- also appreciates as it matures. There's also ongoing demand for timber, because it's an essential input to the residential housing and commercial building sectors.

Timber and forestry ETFs or REITs are among the most convenient ways to invest in timberland. There are also private timberland investing platforms such as AcreTrader.

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Collectibles include classic cars, artwork, comic books, rare stamps and coins, and non-fungible tokens (NFTs) or digital collectibles. These items hold up well against inflation because their values increase when prices rise.

Curating a collectible portfolio you love can be rewarding, which is an advantage over less personal investments like REITs. The primary disadvantages include a lack of price transparency and uncertain growth trajectory. The practical outcome is that you may not know the value of your collectibles until you offer them up for sale.

You can handpick and store your own collectibles. Or, if fine art is your collectible of choice, you might prefer an art investing platform like Masterworks.

ALSO READ: Digital Collectibles: What They Are and How to Get Started

Like a classic car, a bottle of rare wine appreciates over time and with inflation. Unlike a classic car, wine is made to be consumed. When one bottle of a rare vintage goes down the hatch, the remaining wines can show a value boost.

Wine has slightly more price transparency than other collectibles, thanks to the Liv-ex 1000, a fine wine index. In 2022, the index shows year-to-date growth of 11%. That's an appealing number generally, but it's particularly interesting when the S&P 500 is down 14%. The Liv-ex 1000 also showed resiliency in March of 2020 when the S&P 500 fell 25%; in the same time frame, fine wine values dipped only 4%.

There are several wine investing platforms that will select wines and store them for you. Examples are Vint and Vinovest.

Gold is a popular inflation hedge, though its track record in that area has been inconsistent. The basic argument for gold is that it's a commodity with intrinsic value. Therefore, that value should increase when prices rise.

Gold did outperform inflation by a large margin in the 1970s. Unfortunately, it's been less impressive in recent years, including this year. In June 2022, the Consumer Price Index (CPI) rose 9.1% over the prior 12 months. Meanwhile, gold's value is lower than it was one year ago.

Still, many investors stand behind gold as a safe haven for troubled economic times. Those investors can buy physical gold or invest in a gold ETF.

ALSO READ: 3 Unstoppable Gold Stocks to Buy in 2022 and Beyond

Treasury inflation-protected bonds, or TIPs, are debt instruments that link the principal value to the CPI. If the CPI rises, the bond's principal goes up with it. The interest payment rises also.

Deflation has the opposite effect, reducing the bond's principal and interest payment. But at maturity, bondholders are repaid at least the original principal -- or the adjusted principal if it's higher.

You can buy TIPs directly from the U.S. government via TreasuryDirect.gov. You can also invest in TIPs ETFs, which diversify across different maturities.

Cash as an inflation hedge? Morningstar analyst John Rekenthaler says so. Rekenthaler recently compared the growth of cash versus other common asset classes across three inflationary cycles.

Between January 1966 and December 1972, cash showed a small gain but underperformed large stocks and intermediate Treasuries. Between 1973 and 1981, cash outperformed intermediate Treasuries, large stocks, and long Treasuries. To be clear, all of them lost value in this time frame -- but cash lost the least. The same thing happened between May 2021 and June 2022.

What does this mean? Historically, cash hasn't dipped in value as steeply as stocks and bonds when inflation spikes. A primary factor here is the Federal Reserve's raising of short-term interest rates to combat inflation -- which helps cash but can hurt other asset classes.

The flip side is that cash won't rebound later the way other asset classes can. So you wouldn't move into cash if you're already invested in stocks. But you might feel less nervous about holding cash if you need the liquidity.

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Inflation can sap your purchasing power and slash the value of your traditional assets. You can offset some of those effects by investing in assets that appreciate when prices rise.

The challenge is finding the right balance for your inflation hedges. Alternative assets can be unpredictable and, in healthy economic cycles, even disappointing. Overdoing your exposure to alternatives now can easily be counterproductive long term.

You can find that right balance by starting small. Get comfortable with how your alternatives behave first and then increase your allocation accordingly.

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