Do you remember what year it was when a gallon of gas was $0.63? Depending on your age, you may or may not! Answer: The year was 1978.
When the costs of goods and services rise in an economy, inflation may be a part of that price increase. These inflationary forces can create challenges. As savers see their purchasing power decrease, it can lead to less of a desire to save cash. People living on fixed incomes are especially impacted. Fortunately, there are ways to protect yourself against inflation. Here are four:
TIPS: Treasury Inflation-Protected Securities provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater. Interest is paid semiannually at a fixed rate. TIPS can be held until maturity or sold prior to maturity. This is a way of having safe money be protected against inflation.
Precious Metals Funds: Historically, the price of gold tends to increase during inflationary periods as the purchasing power of the dollar decreases. As it takes more dollars to buy an ounce of gold, the price tends to rise. There are numerous precious metal mutual funds that invest in gold and silver, with some even including platinum and palladium in their holdings.
Equities / Equity Mutual Funds: Companies that are in inflationary-sensitive sectors such as industrials and materials can potentially benefit in a higher inflation environment. If a company’s activity is producing a commodity, inflation could potentially contribute to improving the company’s bottom line. There are specialty mutual funds that offer such underlying equities within the fund’s portfolio. Historically, equities have outpaced and outperformed inflation.
Real Estate / REITs: Real Estate Investment Trusts can provide protection against inflation. Real Estate rentals and values tend to increase when prices do. For REITs, the dividends are typically a very attractive benefit. According to Nareit, REIT dividends have outpaced inflation as measured by the Consumer Price Index in all but two of the last twenty years.
It is always wise to be proactive and have strategies at the ready when the possibility of inflation arrives. These assets, among others, can provide diversified methods of protection from eroding purchasing power due to inflation.
If inflation is a concern of yours, please feel free to reach out to us. We would be delighted to discuss a personalized plan tailored to your individual investment objectives and situation.