Hedge Against InflationHedge Against Inflation

It is important to hedge against inflation. Inflation is the rate at which the value of currency is falling. This causes prices of goods and services to rise. To hedge against inflation is the process of protecting against decreased purchasing power. In this article, we will go over five strategies you can use to hedge against inflation.

1. Utilize High-Yield Savings Accounts

Basic checking and savings accounts provide very little interest. This causes the purchasing power of funds in those accounts to dwindle over time. The annual percentage yield on a high yield savings account will not match the rate of inflation but will provide a better income stream than the typical checking and savings account.

2. Buy Treasury Bonds

There are two types of treasury bonds that can help you hedge against inflation. These include:

  • Series I Savings Bonds: These bonds are interest bearing. They also provide very low risk. The annual interest rate is based on a fixed rate. Whereas the semiannual is a variable rate that is based on inflation.
  • Treasure Inflation Protected Securities: These bonds are indexed to help hedge against inflation. This means that as interest rates rise TIPS will adjust to maintain their value.

3. Invest in the Stock Market

All investments carry a level of risk. There are dips and raises in the stock market that will adjust your account value. Generally, though a stock portfolio produces returns that will match or beat out inflation. You can utilize a 401k, IRA, or taxable brokerage account to accomplish this.

4. Diversify Your Portfolio

Investing in the stock market is the first step, diversifying your portfolio is the second step. To diversify your portfolio means to invest your assets into multiple investment vehicles and businesses. If you fail to diversify and invest in only a few companies, if one fails you could lose a substantial amount of your portfolio. If you utilize a wide variety of investments, it can lower your risk. This is because if one performs poorly the others can work together to offset it. Some of the options you can utilize include:

  • Domestic Stocks: These are share in American companies.
  • International Stocks: These allow you to invest in foreign companies. These usually come with a higher level of risk, but also a potential for higher reward.
  • Short Term Investments: These include Certificates of Deposit and money market funds. These investments are conservative with a relatively low level of risk but also come with a lower rate of return.

5. Utilize Alternative Investments

Alternative investments are investments that differ from stocks and bonds. These include:

  • Commodities: These include raw materials like agricultural products, metal, crude oil, and natural gas.
  • Real Estate: You can invest in real estate either by buying property or investing in a real estate investment trust.
  • Gold and precious metals: If you are worried about the value of the dollar decreasing, purchasing precious metals can help hedge against that decline.

You Can Hedge Against Inflation

To hedge against inflation, it is important that you review your finances often to look for areas where you can make improvements.

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