Inflation eats away at the purchasing power of your money, and while you can’t protect against every bit of inflation, there are steps you can take to lessen its impact. By diversifying your investments, considering inflation-resistant purchases and financial products, and keeping yourself up-to-date on economic indicators and policy changes, you can better guard against rising prices.
High inflation erodes purchasing power for both consumers and businesses, driving up costs and eating into profits. Inflation also eats into investment returns, lowering your net worth over time. To combat this, investors should consider adding inflation protection to their portfolios by investing in assets that tend to perform well during inflationary periods. These include real estate, stocks of companies with pricing power and commodities like gold and oil. In addition, Treasury Inflation-Protected Securities (TIPS) adjust their principal values to reflect inflation and provide added protection for bondholders.
A diversified portfolio with a healthy mix of stocks secure gold investment, bonds and cash is typically an effective inflation hedge. However, adding TIPS and commodity-related investments can further reduce the damage to your investment portfolio from inflation.
As prices rise, many people may seek to protect their purchasing power by storing money in a checking or savings account at a bank. However, keeping your money stashed in a basic savings or checking account will slowly erode the value over time. To help keep your money’s purchasing power intact, move some of your emergency and home down payment savings to a savings or money market account that offers an interest rate that keeps up with inflation.
Another great way to protect your money from inflation is to invest in companies that have pricing power, which allows them to pass on increased costs to their customers. This can be due to a strong brand loyalty, a monopoly on a critical product like life-extending medication or because their pipelines have built-in inflation escalator clauses.
Investing in shares of these types of companies is an excellent way to protect against inflation because they are backed by real, tangible assets like factory buildings and machinery. However, it’s important to remember that share prices fluctuate based on market conditions and investor sentiment. The best way to mitigate price fluctuations is by sticking with a buy and hold strategy, spreading risk by owning shares across many different companies and investing in a diversified index fund.
Commodities can be a good inflation hedge, but you need to be careful about overexposure. They often trade based on speculation, and their prices can fluctuate dramatically, which can lead to big losses. Arnott recommends incorporating them into your portfolio only as a supplementary asset class, not as the primary vehicle for inflation protection.