Inflation is an unavoidable reality of economic life. Over time, the purchasing power of money declines as the cost of goods and services rises.

For retirees and those planning for retirement, inflation poses a significant risk, particularly when confronting the challenge of maintaining a steady income stream that keeps up with rising expenses. While traditional investments like stocks and bonds offer varying degrees of protection, real assets play a crucial role in shielding wealth from the eroding effects of inflation.

Let’s explore how real assets can serve as a hedge against inflation, the different types of real assets available, and what investors should consider when incorporating them into their portfolios.

What are real assets?

Real assets are physical or tangible assets that have intrinsic value. Unlike financial assets—like stocks and bonds, real assets derive value from their physical properties and utility. Examples include real estate, commodities (like gold and oil), infrastructure, and natural resources.

Because these assets have a tangible, finite supply and often provide essential services, their prices tend to rise along with inflation. This makes them an attractive option for investors looking to preserve purchasing power over the long term.

How real assets protect against inflation

Real assets help counteract inflation in several ways:

Intrinsic value : Real assets are physical, meaning they hold value independently of monetary fluctuations. Their worth is tied to fundamental factors like supply, demand, and utility, making them less susceptible to inflation-driven depreciation.

Income generation : Many real assets, like rental properties and infrastructure investments, generate income that can rise with inflation. Rental income, for example, tends to increase in tandem with the cost of living.

Scarcity and demand : Assets like real estate and commodities often experience increased demand during inflationary periods. As the cost of living rises, so do the prices of essential goods and services, pushing up the value of real assets.

Correlation with inflation : Historically, real assets have demonstrated a positive correlation with inflation, meaning their prices tend to move in the same direction as the inflation rate. This helps offset the decline in purchasing power experienced by cash and fixed-income investments.

Types of real assets and their inflation-protection benefits

Not all real assets offer the same level of inflation protection. Here’s a closer look at some of the most effective inflation hedges:

Real estate : Real estate has long been considered one of the best defenses against inflation. Property values and rental income typically rise alongside inflation, providing capital appreciation and income generation.

For retirees, investing in income-producing properties—like rental homes, commercial real estate, or real estate investment trusts (REITs)—can offer a steady cash flow that adjusts to inflation over time. Real estate also often benefits from a low correlation with stock market volatility, making it a valuable diversification tool.

Commodities : Commodities include raw materials like gold, silver, oil, natural gas, and agricultural products. These assets tend to appreciate when inflation rises, as the cost of goods increases and demand for physical resources grows.

Gold, in particular, is often seen as a safe-haven asset during inflationary periods. While it does not generate income, it has historically retained purchasing power over the long term. Other commodities, like oil and agricultural products, may also perform well in inflationary environments because they are essential to economic activity and consumer demand.

Infrastructure : Investments in infrastructure—like roads, bridges, energy facilities, and telecommunications networks—provide inflation protection through steady, long-term revenue streams. Many infrastructure projects operate under contracts that include inflation-linked pricing mechanisms, ensuring that income generated by these assets keeps pace with rising costs.

For example, toll roads often have agreements for toll increases tied to inflation, while utility companies can adjust rates to reflect higher input costs.

Investing in infrastructure through publicly traded funds, private investments, or infrastructure-focused REITs can provide income and growth potential.

Natural resources : Timberland, farmland, and water rights are all examples of natural resource investments that can provide inflation protection. The value of these assets typically appreciates as demand for resources increases. They can also generate income through timber harvesting, crop sales, or leasing arrangements.

Farmland, in particular, has shown strong performance during inflationary periods, as rising food prices increase the value of agricultural land.

For investors seeking exposure to natural resources without direct ownership, publicly traded companies and funds specializing in these sectors offer an accessible alternative.

Factors to consider when investing in real assets

While real assets can offer valuable protection against inflation, they are not without risks. Here are some factors to consider:

Liquidity : Real assets, like physical real estate or infrastructure projects, are less liquid than stocks and bonds. Investors should be prepared for more extended holding periods and potential challenges in selling these assets quickly.

Management and operational costs : Owning and maintaining real assets often involves ongoing expenses, like property management fees, insurance, and maintenance costs. These should be factored into any investment decision.

Market fluctuations : While real assets generally provide inflation protection, their value can still be affected by economic cycles, supply chain disruptions, and changes in demand.

Regulatory and environmental factors : Some real assets, particularly in the natural resources and infrastructure sectors, are subject to regulatory policies and environmental concerns that may impact profitability.

How to incorporate real assets into a retirement portfolio

Investors planning for retirement should consider a balanced approach when integrating real assets into their portfolios. Here are some strategies:

Diversification : Spread investments across different types of real assets—like real estate, commodities, and infrastructure—to reduce risk and improve overall portfolio resilience.

Consider REITs and ETFs : For those who prefer liquidity and lower management responsibilities, real estate investment trusts (REITs) and exchange-traded funds (ETFs) that track commodities or infrastructure can provide exposure to real assets without direct ownership.

Assess risk tolerance : Real assets can be volatile, and their performance may vary over different economic cycles.

Understanding your risk tolerance and investment horizon is key to making informed decisions.

Work with a financial professional : Given the complexities involved in real asset investing, consulting with a financial advisor can help tailor an approach that aligns with your retirement goals and risk profile.

Final thoughts

Inflation poses a serious challenge for retirees and long-term investors, but real assets offer a powerful way to protect against its erosive effects.

Investors can preserve their purchasing power and build a more resilient retirement portfolio by investing in tangible, income-generating assets like real estate, commodities, and infrastructure.