Inflation Effects

Inflation Effects

There are many different ways to invest to during high inflationary periods. Depending on whether you are a retiree, new investor or are just trying to limit the effects of inflation on your portfolio, there are a couple of things you can do.

From currency diversification to investing in real estate or commodities to holding precious metals, one has many different avenues to hedge against inflation. For this piece, we will look at the options available to ordinary investors looking to ride out the evil effects of rising inflation.

Treasury Inflation Protected securities
One thing that an investor can do to limit the harmful effects of inflation is to own Treasury Inflation Protected Securities, or TIPS. If you live in the United States and have mostly US-based assets, there are a couple of different ETFs you can buy. TIPS are a treasury security that are indexed against inflation, and are usually considered relatively safe investments since they are backed by the full faith of the US government. TIPS will be indexed to the Commodity Price Index (CPI) and their par value will increase or decrease as the CPI does. TIPS come in a variety of maturities, from 5 to 20 years. There are also TIPS for most industrialized countries, and can be purchased directly through the issuing government. Usually these will be tax free from state and local authorities.

Gold & Silver
One thing that has come back into favor with inflation hawks is to own precious metals like gold or silver. Gold has historically had a 10:1 relationship with bond prices, which makes a great hedge in times of uncertainty. Also, the price of gold has been denominated in US dollars. So, any sort of inflationary pressures that have the price of the dollar going up will also have the prices of gold going up. Also, times of high inflation are usually accompanied by times of panic and uncertainty. Gold has a tendency to gain favor in these times as a flight to quality or safe haven asset.

Currencies
Another, more direct way to combat inflation would be to dump all high inflationary currencies for those with lower inflationary concerns. If you know that your currency is about to – or is going through – a high inflationary period, one can simply sell their high inflation currency for something with a lower inflationary outlook. Not only will you save money by not letting your portfolio crumple, but you should see some appreciation in the other currency as well. Many investors have been getting out of dollars lately and buying the Swiss Franc or Australian Dollar.

Commodities & Real Estate
Another thing people do to fight inflation is to buy goods that should appreciate under inflationary times. Assets like real estate and commodities have shown tendencies to appreciate when the value of the currency they are denominated starts to fall. The goods have to appreciate in order to keep the value they would have lost since the currency went down. The best example of this would be all the commodities (based in dollars) that have appreciated over the past two years as the US dollar has depreciated.

These are just some of the investments available to investors during time of high inflation. Again, depending on where you are in the investing cycle will determine what hedging method is best for you.