Since 1980, the S&P 500 has beaten inflation in 28 out of 40 years, bonds have beaten inflation in 32 out of 41 years, and REITs have beaten inflation in 26 out of 41 years.
Although bonds were slightly more likely to beat inflation than stocks or REITs over that period, bonds generated a smaller return.
Over that period, stocks and real estate had an average annual return of nearly 11%, while bonds saw an average annual return of 7.5%
The S&P 500 outperformed bonds in 26 out of 41 years, while REITs did the same in 25 out of 41 years.
In 1980 and 1981, when inflation was over 10%, REITs beat inflation, while bonds posted positive returns but couldn't keep up with inflation. The S&P 500 posted nearly a 26% return in 1980 and lost 9.73% the following year as inflation persisted.
In short, stocks and real estate can get you through inflationary periods -- as long as you hold on -- while generating strong returns over the longer term 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, being able to invest in real estate, cryptocurrency, commodities, wine, and art during times of inflation is possible for the average investor.
Real estate investment trusts (REITs) provide access to the real estate market and can be traded just like stocks.
Cryptocurrencies like Bitcoin and Ethereum can be traded on many platforms available to all investors.
There are also plenty of exchange-traded funds that track commodities that all investors have access to. You can buy equities directly related to specific commodities -- like agriculture stocks or mining stocks-- too.
In terms of physical goods, like wine and art, don't worry, you don't need to attend an art auction or figure out how to perfectly store wine on your own.
Platforms like Vinovest and Cult Wines will take your investment and manage the logistics of wine investing for you. Platforms like Masterworks allow you to purchase shares of fine art. (Of course, The Motley Fool always recommends doing research into any investment products before you buy in.)
Because these platforms handle the transaction and provide storage, logistics, and insurance, they can come with relatively steep fees. Most also require a minimum account value of at least $1,000.
Alternative investments aren't 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 confident that a diversified portfolio of equities will get you through periods of inflation, albeit with some turbulence.
While inflation can seem spooky, if you have confidence in your investments, your portfolio is diversified, and you can manage to not panic sell when the market drops, you'll be able to weather however the market moves in inflationary periods.
Since 1944, there have been six periods when inflation was 5% or higher compared to the previous year, and those periods lasted three years at most -- and in 2008, only two months.
Over that same time frame, the S&P returned over 2,300%. Not bad, despite a few periods of high inflation.
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