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Real assets can hedge against inflation – with some caveats

Real assets are unlike stocks and bonds for one reason: Their underlying value is connected to an actual, physical thing.

Real assets – you may have heard the term but might not be sure what it encompasses. In today’s economy, with an eye toward the possibility of rising inflation, real assets are getting more airtime. Here’s why.

What’s real?

Typically, physical assets are defined as things that make the world tick. Think about real assets as the physical things on which our framework of modern society and the world rests, what we rely upon to make life move forward. And, because real assets have an underlying hard asset, they can often hold long-term value well. In times of scarcity or when there is greater demand or usage of these physical things, value can increase. In times of inflation, real assets’ worth can increase as well.

A cutting (h)edge?

Seems like not a day goes by when inflation isn’t mentioned in the news. Your advisor can help you assess any potential risk and act accordingly, but, depending on your needs, you may want to ask about three key real assets that can help you hedge against rising costs.

Real estate

Real estate in the form of rental properties can be a good hedge against inflation because as inflation rises, rents tend to as well. If you don’t want to take on the responsibility of being a landlord, buying into a real estate investment trust (REIT) or exchange traded fund (ETF) is a way to participate in the yields of real estate without having to own and maintain a property yourself.

Infrastructure

Real assets in infrastructure like gas, electricity, water, roads, bridges or tunnels often have regulations, concessions or other agreements or contracts built in to protect and even outpace inflation. Even if there is no agreement in place, by nature of a strong strategic position, infrastructure investments can pass inflationary costs on to customers. In addition, infrastructure can be an excellent way to pursue impact investing in things like wastewater treatment, affordable housing, clean energy, nature restoration or public structures. As with all real assets, it can be advantageous to buy into a fund or other instrument trading the real asset so you aren’t taking on the physical responsibility yourself and have some built in diversification.

Commodities

Typically, as inflation goes up, so too will prices on commodities like cotton, wheat, sugar corn or natural gas. This could be good news for an investor who could reap the benefits of increasing prices.

On the other hand

While real assets can seem like the perfect solution to combat inflationary rise, it’s important to stay true to a steady investment course as well, and not rush to put all your eggs in this basket. Here are three things to keep in mind.

Keep it diverse

Keeping your portfolio diversified is a time-tested and allover best strategy. Investment goals should always include adjusting for and trying to beat inflation, but there are many avenues to do this. The best approach is a well-rounded portfolio that will reduce exposure to volatility with a myriad of investments across classes and include alternative investments in that spectrum. Talk to your advisor to dig deeper.

Seesaw

Commodities can be highly volatile. Supply and demand, geopolitics, and even Mother Nature can play a role in pushing the market higher or lower. Active traders add to the volatility mix incentivized by short-term potential yields. Instead of investing in single category commodities, try a diversified ETF to attempt to protect against risk of wild swings in the market.

Credit may be king

If you want to play in the real asset space, or just get your feet wet in this area of investing, something to think about is a securities-based line of credit.* Backed by your brokerage assets, this gives you an opportunity to buy into real assets without having to liquidate marketable securities. Using debt strategically enables you to diversify your income and asset sources while keeping your investments working for you. In addition, historically low interest rates can make your money work harder for you.

The most important thing to remember when thinking about real assets is to look closely at the risk and reward profile of each. Taking into consideration how long you want to keep the asset and what you want it to do for your overall portfolio, as well as talking it through with your advisor, will help guide you to the right mix.

All investments are subject to risk, including loss. Past performance may not be indicative of future results. Asset allocation and diversification do not guarantee a profit nor protect against loss. Real estate investments can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.

*A Securities Based Line of Credit (SBLC) may not be suitable for all clients. The proceeds from an SBLC cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate of Raymond James. Raymond James Bank does not accept RJF stock or any securities issued by affiliates of Raymond James Financial as pledged securities towards an SBLC. Borrowing on securities-based lending products and using securities as collateral may involve a high degree of risk including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the Pledged Account(s) may be sold to meet the Collateral Call, and the firm can sell the client’s securities without contacting them. A client is not entitled to choose which securities or other assets in his or her account are liquidated or sold to meet a Collateral Call. The firm can increase its maintenance requirements at any time and is not required to provide a client advance written notice. A client is not entitled to an extension of time on a Collateral Call. Increased interest rates could also affect LIBOR rates that apply to your SBLC, causing the cost of the credit line to increase significantly. The interest rates charged are determined by the market value of pledged assets and the net value of the client’s non-pledged Capital Access account. Securities Based Line of Credit provided by Raymond James Bank. Raymond James & Associates, Inc., and Raymond James Financial Services, Inc., are affiliated with Raymond James Bank, a Florida-chartered bank.

Sources: forbes.com; businessinsider.com; investopedia.com; firstsentierinvestors.com.au; ipe.com; yale.edu; usnews.com; realassets.ipe.com; kiplinger.com; thestreet.com; thebalance.com; nerdwallet.com