Inflation is one of the biggest problems for investors as it essentially undermines their efforts. Inflation takes spending power away from your money and, as an investor, you have to beat inflation in order to make any money. If you do nothing, inflation will decrease your spending power and make it more difficult to afford your lifestyle. To hedge against inflation, you can use techniques like investing in hard assets or putting money into inflation protected securities.
Instructions
1. Invest a portion of your portfolio into inflation protected securities. The United States Treasury offers I bonds, which are a type of inflation protected bond. You can also buy Treasury Inflation Protected Securities or TIPS. Both of these investments provide you with a guaranteed rate of return over the rate of inflation. These investments work by looking at the changes in the consumer price index and then adding a return on top of that percentage. This ensures that the money you invest will always stay slightly ahead of the rate of inflation.
2. Invest some of the money in your portfolio into precious metals. By investing in precious metals like gold, silver and palladium, you can effectively hedge your portfolio against inflation. Precious metals will actually increase in value with inflation. These precious metals always have retained some sort of value, so they are not quite as risky as some of the other investments that you could put your money into. Precious metals tend to have an inverse relationship to the value of the dollar. When the value of the dollar decreases, gold and silver values tend to increase.
3. Purchase real estate with a portion of your money. As inflation increases, the value of your home will also increase. Over the long term, real estate has been an adequate hedge against inflation. This type of investment will also provide you with use value while you own it, as you can live inside.
4. Invest in mutual funds that aim to provide returns in spite of inflation. Many mutual funds and exchange traded funds use this as one of their primary investment criteria. Some of these funds will invest in Treasury Inflation Protected Securities, while others invest in hard assets like real estate or in precious metals. The advantage of investing in funds is that you can leverage the experience of a professional money manager for making your investment decisions.
