How to Protect Your Investments From Inflation

We haven’t seen inflation more than 3 percent since 2011, but we’re getting close. The inflation rate for August was 2.7 percent, up from 1.9 percent a year ago.

Rising inflation means rising prices, and unless your get a pay raise that at least matches the rate of inflation, you paycheck won’t go as far. In fact, you’re already experiencing higher gas and food prices, and new tariffs are bound to push prices up even more.

Inflation can slam your fixed investments and impact other financial assets as well. And while 3 percent inflation isn’t horrible and it’s probably not time to hit the panic button, cautious investors should start thinking about ways to tilt their investments toward investments that won’t be hurt by higher inflation rates.

[See: Who to Follow on Twitter for Investment Advice.]

“For something to be inflation-proof, there has to be an inflation variable embedded in the investment,” says Stephen J. Taddie, managing partner at Stellar Capital Management in Phoenix, “There are many investments that should run with inflation, but there can be a lag. To me, inflation-proof means that one’s buying power is preserved.”

Taddie prefers U.S. government investment products to inflation-proof your portfolio. The Treasury’s inflation-protected securities, known as TIPS, are a bond-type investment where the principal value changes along with the consumer price index. TIPS pay a fixed interest rate every six months on the changing principal value. Investors can buy TIPS with maturities of five, 10 or 30 years. So as inflation increases, you’ll get the same interest rate, paid on a higher principal value.

I (Inflation) Savings Bonds are sold at face value. The interest rate on I bonds changes every six months, based on the CPI-U (consumer price index for all urban consumers) value. Annually, you’re allowed to buy $10,000 worth of these securities, plus $5,000 with your tax return. These bonds are available in denominations from $50 to $5,000.

Both TIPS and I Bonds can be purchased on the U.S. Treasury direct website.

Chance Butler, founder and CEO at InvestingUnder35 in Queen Creek, Arizona, has made sizeable changes in his client’s portfolios, due to rising inflation. Rising interest rates will thwart bond prices, particularly longer-term bonds, Butler says. And rising inflation makes the fixed coupon payments worth less.

[Read: The Ultimate Guide to Bonds.]

When investing in bonds, keep the maturities short or consider floating rate issues, Butler says. A floating rate bond or certificate of deposit can cushion the pain of rising inflation. These investment’s interest rate or coupon payments rise at a predetermined schedule.

In lieu of bonds, Butler prefers real estate investment trusts during times of rising inflation. “The best REITs are triple-net lease, these companies lock their clients into long-term leases, the client pays for upkeep and they have raises built in to account for inflation,” he says.

Commodities and real assets are popular inflation hedges, says Jonha Richman, partner at JJRichman Ventures with offices in Singapore and the U.K. Look at companies that dig stuff out of the ground. The T. Rowe Price New Era Fund (ticker: PRNEX) typically invests at least two-thirds of its assets in the common stocks of natural resource companies. Other commodity funds include low-fee index funds such as iShares S&P GSCI Commodity-Indexed Trust ( GSG) and Invesco DB Commodity Index Tracking Fund ( DBC).

Gold and silver are popular inflation hedges. When investors get nervous about the economy, inflation and other financial perils, they frequently flock to the stability of gold and silver. Instead of buying the actual metal, you might consider a gold ETF such as the SPDR Gold MiniShares ( GLDM). For silver investing, there’s the iShares Silver Trust ( SLV).

Oil is another commodity that tends to rise with inflation since oil producers can pass their increased costs on at the gas pump. For oil and gas exposure consider the iShares U.S. Oil and Gas Exploration and Production ETF ( IEO) or the United States Oil fund LP ( USO), a fund that tracks crude oil futures.

When considering stock purchases during inflation, Richman recommends focusing on companies that generate cash, with low expenses, while Butler recommends bank and insurance company stocks. “Higher interest rates mean higher lending profits from banks,” Butler says.

[See: 8 Affordable Commodity Stocks to Buy.]

Other considerations for investing in stocks in an inflationary environment include seeking out companies that can increase prices easily without significant loss of market share of unit volume. You might also consider high dividend firms that can hold on to market share during inflation such as drug companies.

You can tweak your investments in response to increasing inflation. But, don’t forget that investing is inherently volatile. In general, diversification is a salvo that heals many wounds. It won’t guarantee positive returns every year, but it will cushion the pain of declining assets as well as any negative impact of inflation on your portfolio.

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How to Protect Your Investments From Inflation originally appeared on usnews.com