- If you’re not careful, inflation can suppress the buying power of your savings from right under your nose.
- Finding investments that keep up with inflation but don’t add too much risk is tricky.
- Certain bonds, stocks and hard assets can be part of a comprehensive strategy to meet inflationary risks.
- I bonds were designed to help Americans with inflation concerns. They pay a variable interest every six months.
Inflation poses a very real risk to your wealth. As the cost of goods rises, your dollars effectively become less powerful.
While keeping your savings in cash usually sounds like the safest option, with inflation currently reaching nearly 7% by some measures, it’s a sure way of seeing your savings dwindle.
Adding a mix of common hedging strategies to your financial plan can help avoid staying complacent in cash. While low-risk investments with 7% annual returns are far and few between, especially in today’s low interest rate environment, simply catching up with inflation as much as possible can improve your financial situation until this storm passes.
Here are some strategies to consider as a hedge against inflation.
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1. Buy I bonds
These investment vehicles are great during times of elevated inflation, as they are guaranteed against losses. I bonds were designed to help Americans with inflation concerns. They pay a variable interest every six months. The expectation is that rates will increase if inflation rises.
The variable rate is currently over 7%, and will next be updated in the spring of 2022. There is also a fixed rate attached to I bonds, however in this low-rate environment the fixed rate is currently at 0% for new issues.
The popularity of I bonds has swelled this year, as they offer a great risk/reward prospect at the moment. Plus, they can offer some tax-saving advantages—for instance, you generally only pay federal, not state taxes.
But there are some caveats. First, they can be purchased only directly from the U.S. Treasury. You won’t be able to purchase them in your brokerage account.
Also, there’s a cap on how much you can purchase. The limit is $10,000 per year, per person. You can add another $5,000 to your annual limit by buying bonds with your tax refund if you get one.
If you purchase an I bond, you should anticipate staying invested for at least a year, as these bonds can’t be redeemed for at least 12 months from purchase. I bonds may be held for up to 30 years, but you’ll be hit with a penalty of three months of lost interest if you redeem one within the first five years.
2. Make investment adjustments
Another way to try to keep up with inflation is to adjust your investment strategy. Some have found stocks to be a good inflation hedge, as some corporations can increase the price of their goods and services in line with inflation, possibly increasing their revenue. For instance, a beverage company may be able to pass on the increase in ingredients costs to consumers without their customers changing their purchasing habits too much. However, keep in mind that stocks are a risky place to park your money.
Some investors are simply lowering their exposure to cash and bonds and increasing their allocation into stock more than they normally would. These investors may have become fed up with trying to find competitive yields on bonds, and have accepted more investment risk for the sake of trying to reduce their inflation risk.
You can get even more tactical than this. Consider what type of companies would be less affected or even benefit from high inflation and research those sectors.
3. Invest in inflation-friendly sectors
Companies that deal in or hold things like real estate, precious metals or energy are thought to work well during inflationary times.
Historically, commodities have been part of a good inflationary hedging strategy. Though keep in mind that that may not necessarily be the case now, and trading in commodities is not for the layman. It would have been difficult to know, for instance, that lumber would thrive and gold would falter during 2021.
Gaining exposure to real estate through an investment vehicle called REITs (Real Estate Investment Trusts) can sometimes be part of your plan. REITs own properties and collect revenue from them. Many long-term leases on these properties allow for REITs to increase their rent during times of high inflation. But be aware that REITs can be considered one of the more volatile investment sectors, and dividends are taxed at ordinary rates.
4. Invest in inflation-hedging funds
If trying to invest around inflation sounds like a lot of work, you’re absolutely right. That’s why there are investment funds managed by professionals who aim to do this.
Among them are the AXS Astoria Inflation Sensitive ETF and Amplify Enhanced Inflation Beneficiaries ETF, both of which are unusual in that they are very open to various investment strategies, as Zweig points out. Their managers have plenty of leeway to invest in a variety of assets that could fight inflation.
ETFs charge a fee which can eat into your gains, though. And as with any investment, there are no guarantees in terms of how they’ll perform.
While rising prices are a risk worth paying attention to, it’s important not to become too hypervigilant. Focusing on just a single data point is not a good investing strategy. Always do your research before making an investment, and look at how any changes align with your overall financial goals.