Physical Assets as a Hedge
Real estate, for instance, can provide consistent cash flow in all economic environments. Fractionalized real estate options have made it possible for investors to buy shares of rental properties for as little as $100 or invest in multifamily and commercial real estate in fast-growing cities. Investing in real estate can be an excellent way to store wealth, and as Musk said, owning a home can be a good way to weather high inflation.
Art, on the other hand, has been a popular method of storing wealth for generations, as it has outperformed the S&P 500 for the past 25 years and appreciates at an average rate of 23.2% in years when inflation is at least 3%. Retail investors can buy shares of valuable works or invest in art funds.
Another physical asset that can provide a hedge against inflation is wine. The Liv-ex Fine Wine 1000 index, which tracks 1,000 wines from around the world, had one of its strongest years in 2022 as inflation soared. While the index is down 0.8% year-to-date, it is up 8.4% over the past 12 months. Retail investors can buy and sell individual bottles or purchase securitized shares of wine collections through investment platforms.
As inflation remains a concern for investors, the notion to invest in physical assets holds true as a great hedge. While some of these options may seem out of reach for the average investor, fractionalized investment opportunities have made it possible to invest in real estate, art, and wine with relatively low buy-ins. Physical assets can provide a sense of stability and consistent returns even during economic uncertainty, making them a valuable addition to any diversified portfolio.
How Does Inflation Boost Physical Assets
Inflation is a term used to describe the general increase in the prices of goods and services over time, reducing the purchasing power of a currency. When the rate of inflation is high, holding onto cash or other liquid assets can be disadvantageous because their real value decreases over time. On the other hand, physical assets like real estate, fine art, and wine tend to appreciate in value or retain their value during periods of high inflation, making them an attractive investment option.
For example, during times of inflation, the cost of building new homes and apartments increases due to the rising cost of building materials, labor, and other expenses. However, the prices of existing properties tend to appreciate in value, creating an opportunity for real estate investors to earn rental income or make profits by selling the property at a higher price in the future. Similarly, fine art and wine are considered inflation hedges because their prices tend to appreciate over time, and they are tangible assets that can hold their value even during periods of economic uncertainty.
Furthermore, physical assets like real estate and fine art can provide diversification benefits to an investment portfolio. These assets tend to have a low correlation with traditional investments like stocks and bonds, meaning that they can perform well even when other asset classes are struggling. This can help investors reduce the overall risk of their portfolio and potentially earn higher returns.
Finally, investing in physical assets like real estate, fine art, and wine can provide a hedge against geopolitical and macroeconomic risks. These assets tend to be less volatile than other asset classes and can provide a stable source of income and wealth preservation during times of economic uncertainty.
While inflation can erode the value of cash and other liquid assets, physical assets like real estate, fine art, and wine and Scotch can provide a hedge against inflation by appreciating in value or retaining their value over time. These assets can also provide diversification and stability benefits to an investment portfolio, making them an attractive option for investors looking to protect their wealth during times of economic uncertainty.
