No one can control inflation rates directly, but we can prepare for periods when prices increase faster than wages by investing in Treasury Inflation-Protected Securities (TIPS), government-issued bonds which adjust principal and interest payments automatically to match rising inflation rates.
inflation can erode the purchasing power of your investments and reduces their real returns, so keeping track of these fluctuations is crucial.
1. Long-Term Bonds
Bonds can help you meet your financial goals and protect against inflation by adding long-term bonds to your portfolio, but you should keep in mind the risk associated with interest rate volatility when allocating them.
Inflation-linked bonds, also known as Treasury Inflation-Protected Securities (TIPS), offer investors an effective means of protecting themselves against inflation. TIPS pay investors an inflation-adjusted interest payment twice annually while their principal value automatically adjusts with inflation rates.
Inflation-linked bonds have quickly become an extremely popular investment option worldwide. Representing an impressive portion of U.S. Treasury debt and serving as an integral component of many investors’ portfolios as well as government budgets worldwide, inflation-linked bonds offer investors protection from inflation while being negatively correlated to stock returns – making them an excellent way of mitigating your exposure to inflation in fixed income portfolios.
2. Short-Term Bonds
Traditional wisdom holds that long-term conservative investors should favor bonds due to their perceived low risk. But investors should understand that conventional bonds and nominal money market funds expose investors to inflation (purchasing power risk).
The purchasing power risk arises from bonds offering investors a fixed amount of interest throughout their lifespan; should prices increase (which they are likely to do), their principal value may decrease and thus yielding a rate of return below your required rate of return.
Treasury Inflation-Protected Securities (TIPS) are bonds designed to hedge inflation, providing both interest payments and principal protection. Unfortunately, TIPS are only available to investors with five year time horizons and tend to have limited liquidity in their market place – therefore Strategic Advisers, LLC has implemented specific steps within client accounts in order to preserve purchasing power by emphasizing inflation-indexed investments with shorter maturities.
3. Stocks
Stocks represent a fraction of ownership in a company and offer potential returns through value appreciation and dividend payments. Some industries benefit from inflation (such as technology businesses and communication services) while other businesses face increased input costs and less demand; stock prices may fluctuate in response to market trends, investor sentiment analysis, company forecasts or other external influences.
Stocks of companies that can pass along price increases tend to do well during periods of moderate inflation; however, when inflation occurs alongside stagnation in the economy and job market – known as “stagflation”-stock prices tend to decline faster than consumer prices, which can damage investment performance. One way of guarding against this form of inflation would be investing in real assets and commodities with potential inflation-proof gains like oil or precious metals or investment vehicles that offer fixed income payments that index with inflation like an annuity or bond.
4. Share Certificates
Share certificates may not provide as much growth potential as other investment options, but they still offer higher fixed-interest rates than basic savings accounts and are FDIC insured up to $250,000. They come with various term lengths – longer-term certificates typically offer higher returns; credit unions often reward your commitment to longer-term share certificates by increasing the interest rates provided.
Inflation-indexed bonds, also known as inflation-linked bonds or TIPS, adjust both principal amounts and interest payments to maintain the real value of investments in an inflationary environment. Investors, issuers and policymakers all gain from inflation-indexed bonds because they remove any risk that expected inflation may exceed nominal interest rates and cause negative real returns for their investments.
Indexed bonds present a number of disadvantages over regular bonds, most notably reduced returns due to no inflation risk; however, investors looking for long-term stability while protecting purchasing power might prefer them over standard bonds.
