4 Ways to Protect Against Inflation
Do you remember a time when a gallon of gas cost 63 cents? For some, it’s a nostalgic memory from 1978, while for others, it may seem like a distant dream. Fast forward to today, and rising prices are becoming a familiar concern for many. When the costs of goods and services increase, inflation often plays a role, creating challenges for savers and those on fixed incomes as their purchasing power shrinks. The good news? There are effective investment strategies to safeguard your finances against the effects of inflation. Here are four ways to protect yourself:
- TIPS[i]: Treasury Inflation-Protected Securities are a smart way to shield your investments from inflation. With TIPS, the principal amount increases with inflation and decreases during deflation, as measured by the Consumer Price Index. When your TIPS mature, you’ll receive either the adjusted principal or the original amount—whichever is higher. Interest payments are made semiannually at a fixed rate, providing a steady income stream. You can choose to hold onto your TIPS until maturity or sell them on the secondary market, though it’s important to note that selling early might mean receiving less than your initial investment.
- Precious Metals Funds[ii]: Historically, gold prices tend to go up during times of inflation because the dollar loses value. When it costs more dollars to buy an ounce of gold, the price rises. So, how is gold doing right now? According to CBS News, gold has been on an impressive upward trajectory since the start of the year. On Jan 1, 2024, it was trading at $2,063.73 per ounce. Fast forward to Oct 25, 2024, and the price of gold is sitting at $2,734.46 per ounce. This represents an increase of $670.73 per ounce, amounting to a growth rate of approximately 33% in a little over 10 months. There are many precious metals funds that invest in gold and silver, and some even include platinum and palladium. These funds can be a smart way to invest in valuable metals when the economy gets shaky.
- Commodity Mutual Funds[iii]: Generally, commodity prices go up when inflation rises. For example, when the cost of corn and wheat go up, the cost of cereal often rises along with it. There are plenty of mutual funds that focus on agricultural and energy commodities, allowing you to invest in these essential goods. As the prices of these raw materials increase, these funds could see potential benefits, making them an interesting option for your portfolio.
- Real Estate / REITs[iv]: Real Estate Investment Trusts (REITs) can be a great way to protect your investments from inflation. As prices rise, rental rates and property values usually go up, too. Plus, REITs offer dividends, which can be a nice bonus for investors. In fact, according to Nareit (Oct 2019), REIT dividends have outpaced inflation in all but two of the past twenty years.
Being proactive and having strategies in place for potential inflation is always a smart move. The investments mentioned above, among others, can help offer a diversified approach to protecting your purchasing power.
If inflation is a concern of yours, please feel free to reach out for a no-obligation consultation. We would be delighted to discuss a personalized plan tailored to your individual investment objectives and situation.
The information contained in this material is for general information only, and not a recommendation or solicitation to buy or sell investment products. For a comprehensive review of your personal situation, always consult with a financial, tax, or legal advisor. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
[i] Tips are purchased in multiples of $100, terms are 5, 10, and 30 years. TIPS can be sold on the secondary market, which are determined by supply and demand.
[ii] Precious metal funds can have volatile price fluctuations and initial costs can be high.
[iii] Commodity funds are not appropriate for all people. Certain market conditions could contribute to a substantial risk of loss. You should consider the losses prior to making a purchase.
[iv] REIT funds hold Real Estate investment Trust in their portfolios which are subject to various risks such as liquidity and property devaluations based on adverse economic and real estate market conditions and may not be suitable for all investors. They are sensitive to interest rates, economic conditions (both nationally and locally), property tax rates, and other factors. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry.
