Two Ways To Protect Yourself From Inflation

Fri, Nov 19, 2010

Financial Advice, Investment

Hi NeedMoney fans,

I’ve recently discussed ways to protect yourself from mortgage modification scams and from identity thieves. Now, I’d like to convey some advice relating to how to protect yourself against a more insidious enemy — inflation. Should inflation rise, the actual value of the majority of your investments — especially fixed income — declines. This can throw a serious monkey wrench into your retirement strategy. It is impossible to predict for sure what inflation will be into the future, but at the rate the U.S. Government is printing money, it isn’t a leap to suspect that serious inflation awaits us down the road. So what steps can you take in order to make your retirement portfolio more “inflation proof”? The following two components within your portfolio can help insulate you from the ravages of inflation should it occur:

1. TIPS

TIPS stands for Treasury Inflation Protected Securities. These are risk-free Treasury Bills guaranteed by the United States Government. However, they differ from typical T-Bills in that they are indexed to inflation. Should inflation rise, then your interest rate received on your TIPS will commensurately rise. This protects you against a decline in real value within your portfolio due to inflation. TIPS can be purchased directly from the Treasury Department.

2. Commodities

The value of commodities — such as oil and gold — rise and retain their effective buying power within an inflationary environment. You can achieve exposure to commodities within your retirement portfolio in a variety of ways. One of the easiest ways is via an Exchanged Traded Fund (ETF). For example, ticker symbol GLD mirrors the price of gold. You can buy shares of GLD within your retirement portfolio, and this is the same as owning actual gold. There are also ETF’s which attempt to mirror the price of oil and other commodities.

By including both of these asset classes within your retirement portfolio, you are hedging yourself against the risk of inflation. This simple step could very well substantially increase your lifestyle in retirement. Right now, my retirement portfolio is weighted 10% in TIPS and 15% spread across various commodities. If you haven’t addressed your exposure to inflation, then now is the time to do so.

James

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