When it comes to investing, there are many things that can potentially ruin investor returns. One of them is inflation. This is because inflation has the potential to reduce the purchasing power of investments. In other words, the amount of money invested will be worth less because the cost of goods and services are higher.
To protect investments from being demolished by inflation, it is important to invest in assets that will earn a rate of return that is greater than the value of inflation. One asset class that has a proven record of outperforming inflation are alternative investments. Let us look at how alternative investments can help us beat the negatives of inflation.
What are Alternative Investments?
Alternative investments are assets that are outside the traditional asset classes of stocks, bonds, and cash. These non-traditional assets can be commodities, real estate, hedge funds, private equities, private placements, cryptocurrency, etc.
Why are Alternative Investments a good option for beating inflation?
- Good for diversification
Alternative assets tend to be less correlated with traditional asset classes, which means they can provide diversification benefits. This is important because it means that when traditional assets such as stocks and bonds are struggling, alternative investments may still be performing well, as they are doing now.
- Increases value during inflation
Alternative investments can be a great option for beating inflation because they often increase in value during periods of inflation. This is because many alternative assets are hard assets such as real estate or commodities, which increase in value when prices are rising. One good example would be that property owners can increase rent to keep up with inflation which could bode well for real-estate investment trusts (REITs).
- Tax benefits
Alternative assets may also have tax benefits associated with them. For example, many alternative investments are structured as pass-through entities, which means that their profits and losses are passed through to the investor and taxed at the individual level. This can result in a lower effective tax rate than the tax rate that would apply to a traditional taxable account.
- Potential for higher returns
Lastly, alternative investments offer investors the potential for higher returns than traditional assets such as stocks and bonds. This is because they can be riskier, which means there is a greater chance of losses, but also a greater potential for gains. For example, a venture capital fund may invest in a portfolio of high-growth start-ups that could go to zero or could generate returns of ten times or more.
Alternative Investments can be a powerful addition to any portfolio to help offset inflation. These investments can add diversification to help mitigate market volatility and instability. Alternative investments can also offer the potential for higher returns than traditional investments, especially during times of uncertainty and high inflation.