When the markets are volatile, protecting your money against inflation can be challenging.
Many people make the mistake of ignoring inflation. It may not amount to much in a single year, but over a period of two to three decades you could actually see your costs of living go up by 100% more than once.
Here are five investments that should help you fight off the effects of inflation.
Short term bonds
Bond income is typically fixed, so investors may wonder how it can help to mitigate the effects of inflation. But when you choose to invest in short term bonds your exposure to longer term inflation risks is eliminated.
When the short term bonds mature, you have the option to purchase new ones at higher yields, which could be more lucrative at that time because interest rates tend to rise when inflation increases.
TIPS (Treasury Inflation Protected Securities)
The U.S. Treasury issues these government-backed bonds along with an inflation rider. This inflation component of TIPS will adjust the value of your principal sum invested in sync with the consumer price index.
However, you should know that just like any other bonds the value of TIPS can temporarily decline if the interest rates rise. Having said that, TIPS are worth considering if you are looking for dual protection against inflation as well as the risk of issuer’s credit default.
Investing in the stocks of quality companies can provide a solid hedge against an inflationary future. With the right choice of stocks you can protect yourself against inflation in two ways.
At first, these stocks are likely to pay you a fairly consistent level of dividend. Secondly, the growth in the market value of the stock serves as a robust inflation-combating component.
Historically, stock prices tend to move higher. While an individual stock does not guarantee long-term growth, a diversified equity portfolio of stocks usually moves higher, short-term volatility notwithstanding.
Commodities and natural resources
Investing in commodities and natural resources is trickier than owning stocks, but it is generally accepted that commodity prices rise in inflationary environments. And when the inflationary pressures are commodity-driven, obviously commodity prices are rising.
For instance, during the 1970s a major global energy crisis led to extremely high inflation levels in the United States and elsewhere. Gold prices spiked, oil prices zoomed, and the prices of several other natural resources and commodities also rose. In those types of situations, investing in this asset class will protect you against inflation.
Real estate traditionally has been considered as an excellent inflation hedge. During the 1980s and ’90s home prices rose dramatically, which enabled investors to offset the effects of inflation.
Another way real estate can protect you in an inflationary environment is that the rental values may rise. Therefore, if your cost of living has jumped due to inflation increased rental income will improve your cash flow and serve as a hedge against inflation.