Are Alternative Investments the Best Inflation Hedge? Here’s the Data

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

While the relationship between inflation and stock returns is extensively studied and discussed, trying to find investments that act as a hedge against inflation is common.

Alternative investments such as gold, wine, art, and real estate are often cited as investments that can “beat inflation” or record returns above the percentage of inflation over a given period.

Ultra-high net worth investors (those with a net worth of at least $30 million) are major investors in alternative investments. The 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 art stocks and other collectibles, invest in real estate, and buy cryptocurrency.

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

Main results

  • Alternative investments, including wine, whiskey, real estate, art, commodities, and cryptocurrency, beat inflation in 2021 — but stocks did, too.
  • Stocks outperformed bonds, gold, wine and whiskey in 2021 amid rising inflation. art, bitcoin (CRYPTO: BTC), Ethereum (CRYPTO: ETH)Commodities generated a greater return than stocks in 2021.
  • Over the past five years, stocks have averaged higher returns than gold, wine, art, REITs, and commodities.
  • Since 1980, bonds have come before inflation more often but have generally remained lower than stocks 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, arts, and cryptocurrency beat inflation in 2021 (and so did stocks)

Inflation grew 7% from December 2020 to December 2021, but that didn’t stop Alternative Investments and the S&P 500 from posting significant gains.

2021 percent change

Ethereum

2,724%

encoder index

177%

art

58.81%

Bitcoin

57%

real estate investment funds

40.11%

goods

37.95%

Standard & Poor’s 500

26.89%

whiskey

20.62%

vintage

19.10%

inflation

7%

bonds

-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 Contracts Gold Futures No. 1 (GC1). Inflation data is the year-to-date change from November 2020 to November 2021.

The S&P 500’s 2021 return of 26.89% was strong enough to beat inflation and yields from bonds, wine, and whiskey (based on their respective indexes).

But the S&P 500 has been outdone by a number of alternative investments amid rising inflation.

Art reported a 58.81% return in 2021, based on the All Art Index of art market research, which tracks auction sales.

The cryptocurrency continued its upward trajectory. Bitcoin, despite losing over the year, saw a growth of 57% in 2021. Ethereum, the second largest cryptocurrency by market capitalization after Bitcoin, recorded a staggering 2.724% gain.

Cryptocurrency in general has performed exceptionally well in 2021. The S&P Cryptocurrency Digital Market Index, which widely tracks the performance of digital assets, is back 177% in 2021.

Real estate investment trusts (REITs), made up of companies that own real estate, returned 40.11% in 2021, based on 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 Commodity Index. Commodities have been one of the most consistent hedges against unexpected inflation, which makes sense given that the rise in the cost of consumer goods is driven in part by the increased cost of raw materials.

Gold saw a general decline in 2021, posting a 6% loss despite the traditional belief that it is a safe store of value, particularly in times of inflation. The idea of ​​gold being a hedge against inflation is a myth, and the metal has been consistently defeated by stocks.

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

While alternative investments have posted solid returns as inflation kicks in in 2021, their performance over the past five years has been volatile.

Among the alternative investments, cryptocurrencies have shown by far the most volatility based on annual returns.

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

Although the S&P 500 is slightly more volatile than wine, whiskey and gold, it has also posted stronger average annual returns over the past five years from three alternative investments as well as REITs.

general

inflation

Standard & Poor’s 500

bonds

vintage

whiskey

art

encoder index

Bitcoin

Ethereum

real estate investment funds

goods

gold

2021

7%

26.89%

-1.29%

19.10%

20.62%

58.81%

177%

57%

2,724%

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%

1,291%

8,965%

9.00%

13.19%

12.68%

Average annual return from 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 Total Bond Index, Live-ex, Rare Whiskey 101, Art Market Research, S&P Cryptocurrency Broad Market Digital Index, CoinDesk, S&P GSCI. Bitcoin data from 2014 begins on November 4. Inflation data from 2021 is the overall change so far from December 2020 to December 2021.

Alternative investments also come with unique risks.

Stocks are strictly 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.

Physical alternative assets are by definition illiquid, which can create headaches if funds from this investment are needed but cannot be accessed quickly.

Owning a physical asset can also require payment of insurance fees if the asset is damaged as well as an asset maintenance fee. Climate-controlled wine cellars and artwork storage aren’t free, after all.

Stocks, bonds and real estate beat inflation constantly

Since 1980, the S&P 500 has beaten inflation in 28 out of 40 years, bonds have beat 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 during that period, bonds generated a lower return.

During that period, stocks and real estate generated an average annual return of close to 11%, while bonds saw an average annual return of 7.5%.

The S&P 500 has outperformed bonds in 26 out of 41 years while REITs have done the same in 25 out of 41 years.

In 1980 and 1981, when inflation exceeded 10%, REITs beat inflation, while bonds posted 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 as inflation continued.

In short, stocks and real estate can go through periods of inflation – as long as you keep – while generating solid returns in the long 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, the ability to invest in real estate, crypto-commodities, wine, and art during times of inflation is feasible for the average investor.

Real estate investment trusts (REITs) provide access to the real estate market and can be traded just like stocks.

Cryptocurrencies such as 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 are accessible to all investors. You can buy shares that are directly related to certain commodities – such as agricultural shares or mining shares – as well.

Regarding physical goods, such as 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 your wine investment for you. Platforms such as Masterworks allow you to buy shares in the fine arts.

Since these platforms handle the transaction and provide warehousing, logistics, and insurance, they can come with relatively hefty fees. Most of them 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 cryptocurrencies, commodities, wine and art, you can be confident that a variety of stocks will make you go through periods of inflation albeit with some turmoil.

Although inflation can seem intimidating, if you have confidence in your investments, your portfolio is diversified, you can manage not to panic selling when the market is down, and you will be able to hold out as the market moves in periods of inflation.

Since 1944, there have been six periods when inflation has been 5% or higher compared to the previous year, and those periods have lasted at most three years – and in 2008, just two months.

During the same time frame, Standard & Poor’s returned more than 2,300%. Not bad, despite a few periods of high inflation.

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This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.