Are alternative investments the best hedge against inflation? Here are the data

For most investors, inflation is one of the scariest words they can hear.

While the relationship between inflation and stock returns is the subject of intense study and debate, it is common to try to find investments that act as inflation hedges.

Alternative investments like gold, wine, art, and real estate are often cited as investments that can “beat inflation” or show percentage returns higher than the inflation percentage over a given period.

High net worth investors (those with a net worth of at least $30 million) are big investors in alternative investments. A Motley Fool survey found that in 2020 these investors had 50% of their assets in alternatives.

Alternative investments are no longer limited to the super-rich. The average investor can now invest in fine wines and spirits, buy stocks of art and other collectibles, invest in real estate, and buy cryptocurrency.

But are the alternatives really a good way to fight inflation? Or should you just stick to stocks? We dug into the data to find out.

Main conclusions

  • Alternative investments including wine, whisky, real estate, art, commodities and cryptocurrency beat inflation in 2021, but so did stocks.
  • Stocks outperformed bonds, gold, wine and whiskey in 2021 amid high inflation. art, bitcoin (CRYPTO: BTC), Etherum (CRYPTO:ETH), and commodities outperformed equities in 2021.
  • Over the past five years, equities have on average outperformed gold, wine, art, real estate investment trusts and commodities.
  • Since 1980, bonds have more often than not exceeded inflation, but all the same have generally yielded less than equities and real estate.
  • Alternative investments can be more volatile than stocks and bonds and come with unique risks and challenges.

Alternative investments like wine, real estate, art and cryptocurrency beat inflation in 2021 (as did stocks)

Inflation rose 7% from December 2020 to December 2021, but that didn’t stop alternative investments and the S&P 500 from posting big gains.

2021 percentage change

Ethereum

2724%

Crypto index

177%

Art

58.81%

Bitcoin

57%

REIT

40.11%

Merchandise

37.95%

S&P500

26.89%

Whiskey

20.62%

Wine

19.10%

Inflation

seven%

Obligations

-1.29%

Gold

-6.06%

Data sources: Bureau of Labor Statistics, S&P Global, Bloomberg Barclays US Aggregate Bond Index, Live-ex, Rare Whiskey 101, Art Market Research, S&P Cryptocurrency Broad Digital Market Index, CoinDesk, FTSE Nareit US Real Estate Index, S&P GSCI, COMEX Gold Futures #1 (GC1). Inflation data is the year-to-date change from November 2020 to November 2021.

The S&P 500’s return of 26.89% in 2021 was strong enough to beat inflation and bond, wine and whiskey returns (based on the indices of each).

But the S&P 500 was outperformed by a number of alternative investments amid rising inflation.

Art returned 58.81% in 2021, based on Art Market Research’s All Art Index, which tracks auctions.

The cryptocurrency continued its bull run. Bitcoin, despite bullishness throughout the year, saw 57% growth in 2021. Ethereum, the second-largest cryptocurrency by market capitalization behind Bitcoin, recorded a stunning gain of 2,724% .

Overall, crypto has performed exceptionally well in 2021. The S&P Cryptocurrency Broad Digital Market Index, which broadly tracks the performance of digital assets, returned 177% in 2021.

Real estate investment trusts (REITs), made up of companies that own real estate, returned 40.11% in 2021, according to the FTSE Nareit Real Estate Index.

Commodities are the raw materials used to create consumer products, and they returned 37.95% in 2021, based on the S&P GSCI, a commodity index. Commodities have been one of the most consistent hedges against unexpected inflation, which makes sense given that the rising cost of consumer goods is partly driven by rising commodity costs.

Gold has had a year of decline in 2021, posting a 6% loss despite traditionally being considered a safe store of value, especially in times of inflation. The idea that gold is an inflation hedge is a myth, and the metal has always been beaten by stocks.

Wine, real estate, art and cryptocurrency can outperform inflation and the market, but come with risk and volatility

While alternative investments have posted strong returns as inflation took off in 2021, their performance over the past five years is fraught with volatility.

Among alternative investments, cryptocurrency has shown by far the greatest volatility based on annual returns.

Since 2017, wine has been the least volatile alternative investment, followed by whiskey, gold, REITs, commodities and art.

The S&P 500, while slightly more volatile than wine, whiskey and gold, has also posted a higher average annual return over the past five years than three alternative investments as well as REITs.

Year

Inflation

S&P500

Obligations

Wine

Whiskey

Art

Crypto index

Bitcoin

Ethereum

REIT

Merchandise

Gold

2021

seven%

26.89%

-1.29%

19.10%

20.62%

58.81%

177%

57%

2724%

40.11%

37.95%

-6.06%

2020

1.20%

16.26%

7.51%

2.30%

15.63%

-18.98%

255%

304%

466%

-7.16%

-6.31%

24.02%

2019

1.80%

28.88%

8.72%

-4.13%

10.91%

-0.01%

47%

87%

-8%

14.94%

15.58%

18.61%

2018

2.40%

-6.24%

-0.05%

10.00%

20.10%

11.65%

-81%

-72%

-83%

-0.89%

-15.24%

-2.64%

2017

2.10%

19.42%

3.54%

10.00%

44.68%

8.94%

1,831%

1291%

8.965%

9.00%

13.19%

12.68%

Average annualized return, 2017 to 2021

2.86%

17.04%

3.69%

7.45%

22.39%

12.08%

446%

333%

2,413%

11.20%

9.03%

9.32%

Data sources: Bureau of Labor Statistics, NASDAQ, Bloomberg Barclays US Aggregate Bond Index, Live-ex, Rare Whiskey 101, Art Market Research, S&P Cryptocurrency Broad Digital Market Index, CoinDesk, S&P GSCI. Bitcoin data for 2014 begins on November 4. Inflation data for 2021 is the year-to-date change from December 2020 to December 2021.

Alternative investments also carry unique risks.

Stocks are tightly regulated by government agencies and the exchanges on which they are listed, while the wine, whiskey, art, and cryptocurrency markets operate with relatively little regulation and can lack transparency.

Alternative assets that are physical are by definition illiquid, which can create a headache if the funds for such an investment are needed but not readily available.

Owning physical assets may also require the payment of insurance in case the asset is damaged as well as the cost of maintaining the asset. Temperature-controlled wine cellars and art storage don’t come free, after all.

Stocks, bonds and real estate have consistently beaten inflation

Since 1980, the S&P 500 has beaten inflation 28 out of 40 years, bonds have beaten inflation 32 out of 41 years, and REITs have beaten inflation 26 out of 41 years.

Although bonds were slightly more likely to beat inflation than stocks or REITs during this period, bonds generated a lower return.

Over this period, stocks and real estate have had an average annual return of nearly 11%, while bonds have had an average annual return of 7.5%.

The S&P 500 has outperformed bonds 26 of 41 years, while REITs have outperformed 25 of 41 years.

In 1980 and 1981, when inflation was over 10%, REITs beat inflation, while bonds showed positive returns but could not keep up with inflation. The S&P 500 returned nearly 26% in 1980 and lost 9.73% the following year due to persistent inflation.

In short, stocks and real estate can get you through periods of inflation – as long as you hold out – while delivering strong long-term returns and avoiding the downsides of alternative investments.

How can the average investor use alternative investments to hedge against inflation?

While 50% of ultra-high net worth investors hold alternative investments, it is possible for the average investor to invest in real estate, cryptocurrency products, wine, and art during times of inflation.

Real Estate Investment Trusts (REITs) provide access to the real estate market and can be traded like stocks.

Cryptocurrencies like Bitcoin and Ethereum can be traded on many platforms accessible to all investors.

There are also many exchange-traded funds that track commodities that all investors have access to. You can also buy stocks directly linked to specific commodities, such as agricultural stocks or mining stocks.

When it comes to physical goods, like wine and art, don’t worry, you don’t need to attend an art auction or figure out how to store wine perfectly on your own .

Platforms like Vinovest and Cult wines will take your investment and manage the logistics of investing in wine for you. Platforms like masterpieces allow you to buy fine art stocks.

Since these platforms handle the transaction and provide storage, logistics, and insurance, they can incur relatively high fees. Most also require a minimum account value of at least $1,000.

Alternative investments are not the only way to hedge against inflation. If you don’t want to dive into the world of cryptocurrency, commodities, wine and art, you can be sure that a diversified portfolio of stocks will see you through periods of inflation, but with some turbulence.

Although inflation can seem scary, if you are confident in your investments, your portfolio is diversified and you manage not to panic by selling when the market goes down, you will be able to withstand market movements during downturns. ‘inflation.

Since 1944, there have been six periods when inflation was 5% or more over the previous year, and these periods lasted at most three years – and in 2008, only two months.

During the same period, the S&P returned more than 2,300%. Not bad, despite some periods of high inflation.

Sources

This article represents the opinion of the author, who may disagree with the “official” endorsement position of a Motley Fool premium advisory service. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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