Five Tips to Shield Your Finances from Inflation

Do you remember what year it was when a gallon of gas was $0.63? Depending on your age, you 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. Inflationary forces can create challenges for savers as they see their purchasing power decrease. It can also reduce the incentive to save.

People living on fixed incomes can be especially impacted. Fortunately, there are potential ways to protect yourself against inflation. Here are five:

1. TIPS: Treasury Inflation-Protected Securities help provide protection against inflation. The principal of a TIPS bond increases with inflation, as measured by the Consumer Price Index. When a TIPS bond 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 on the second market, but if you sell it prior to maturity, you may receive less than the principal invested.

2. Precious Metals: 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. How has the price of gold behaved lately? There are numerous ways to invest in gold and silver, and some strategies even including platinum and palladium in the mix.

3. Commodites: Broadly speaking, the price of commodities tends to increase during periods of inflation. Think of the corn and wheat that go into a box of cereal —the rising cost of the raw materials tends to increase the price of the finished product. There are many ways to invest in agricultural and energy commodities that can potentially benefit from an increase in underlying commodity prices.

4. Equities: Companies that are in inflationary-sensitive sectors such as industrials and materials can potentially benefit in a higher inflation environment.  If a company has the ability to raise prices as the input costs rise, then inflation could potentially contribute to improving the company’s bottom line. 

5. Real Estate / REITs: Real Estate Investment Trusts may provide protection against inflation but they are not without risk!  Real Estate rentals and values tend to increase when prices increase, but there is no guarantee they will in the future. For REITs, the dividends can also be a benefit. According to Nareit/October 2019, REIT dividends have outpaced inflation as measured by the Consumer Price Index in all but two of the last twenty years.  

It is 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. Although, a diversified portfolio does not assure a profit or protect against loss in declining markets, it may provide long-term benefits if it is structured well.

While the Fed may believe they have inflation under control in the near-term, our $34 trillion of national debt (that is increasing by more than $2 trillion each year) does not bode well for those who ignore the potential for their purchasing power to decline over time.

If inflation is a concern of yours, feel free to reach out to us. We would be happy to discuss the items above and other ways to prepare for an inflationary environment in the future.

This article is a general communication being provided for informational and educational purposes only and is not meant to be taken as tax advice, investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions, inflation or US tax policy. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.

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