Inflation Hedging Basics

By Mika Hamilton

“Unless you have a definite, precise, clearly set goals, you are not going to realize the maximum potential that lies within you.” -Zig Ziglar

Hedging is an investment technique that every single investor should be aware of. Many people will talk about hedging but most people do not know what hedging is, how it works, or if it is right for their specific financial situation. Hedging is a form of insurance. It allows people to protect themselves against negative growth in the stock market and economy. For example, if you own a house and have house insurance – this can be considered hedging yourself against disasters. Hedging is an excellent way to protect your money from inflation.

Every level of investor can benefit from hedging. Financial advisors, managers, casual investors and even corporations use hedging to protect themselves against risk. Obviously, hedging is far more complicated than just buying insurance. In the investment world hedging uses tools, available in the stock market, to balance the risk of two opposing value changes.

Most investors protect one investment by making another. Invest in two stock options which have a negative relationship. This means as one stock goes down, the other one goes up. Hedging is not a way to make money or increase your net worth. It's sole purpose is to protect your investments by keeping your investment portfolio balanced. It is a way in which you can compensate for inflation and keep your financial situation healthy.

Issues to Consider – Hedging can help you protect your investments but remember the money placed into a hedge will not help you grow financially. Hedge funds are extremely expensive and, especially for people who are investing for retirement, not the best place to invest money if you are trying to secure funds for your future.

There are no guarantees in hedging. It, like all investments tools and vehicles, can offer no promises and there is still risk associated with hedge fund investing. Most casual investors will never be personally involved in hedging. It is important to know about because many of the companies you are investing in use hedge funds to protect themselves against inflation and other market fluctuations.

Companies utilizing hedge funds may be over stating their profits or they are in financial trouble. Hedging can be seen as an economic indicator of how well a corporation is doing, and their future viability. Understanding hedging can help you make better decisions about what companies to invest in and which companies to avoid. Only through being an informed and current investor can you make the right decisions for your financial future.

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