Inflation has not been an issue for the past several years, but eventually it’s bound to return. And, by the time it arrives, it may be too late to protect your purchasing power. Now is the time to consider your options before inflation is on your doorstep. Here are some ways to protect yourself now from inflation later:
Treasury Inflation Protected Securities (TIPS)
Most bonds pay a fixed amount of interest each year until maturity. As a result, when you invest in bonds, your income is eroded by inflation; for example, if your bond portfolio returns 5 percent per year, and inflation is 3 percent, your actual return is only 2 percent.
TIPS are different. These bonds, issued by the federal government, are directly linked to the Consumer Price Index (CPI) – a common measure of inflation. So, when inflation rises, the income you receive from TIPS rises as well.
As you know, stock prices fluctuate. In times of economic uncertainty – such as rising inflation – those fluctuations can be more pronounced. Even so, stocks can help protect a portfolio from inflation. That’s because when inflation rises, many companies can raise their product prices to keep their profit margins high. And high profit margins often lead to high equity prices.
Real estate or REITS
Real-estate prices tend to rise along with CPI. For many investors, however, investing directly in property is too expensive. Real estate investment trusts (REITs) are another option. These are pools of properties with shares that can be bought and sold much like stocks. Just like stocks, however, they may be volatile.
While there are many options for protecting yourself against inflation, there’s one option you shouldn’t choose, and that’s not investing at all. Investors who decide to invest solely in Treasury bills, certificates of deposit, and savings accounts must accept the fact that inflation may eat away at their investment return.