Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man. – Ronald Reagan
It is no secret that inflation is running rampant around the globe. From the price of groceries to the price of housing, everything has become considerably more expensive. If we don’t properly hedge against inflation, we would continue to get poorer as our purchasing power diminish.
Here are 7 steps to take to hedge against inflation.
1. Invest in Commodities that have Utility: Commodities generally have the ability to increase their pricing to keep up with inflation or to exceed it. Items such as natural gas, coffee, electricity etc. Commodities that have market utility tend to rise to keep up with inflation. More excitingly, investors can easily invest in broad ETFs that invest or track commodities.
2. Invest in Cash Flow Producing Real Estate: Real Estate generally has kept up with inflation over the years and often exceeded inflation. As inflation rises, so does the cost of construction, which generally raises the value of Real Estate. Investing in cash flow producing Real Estate provides an excellent hedge to inflation, as investors could raise rent when applicable to keep up with inflation, even as the value of Real Estate rises.
3. Negotiate a Pay raise with your employer: Most companies have the ability to raise their prices to accommodate inflation, consequently as an employee, if you are making the same amount of money or if your pay raise is below the rate of inflation, your purchasing power is diminishing. You should consider negotiating a pay raise to match the rate of inflation or better.
4. Invest in Treasury Inflation-Protected Securities (TIPS): TIPS are securities provided by the US Government to help investors combat inflation. TIPS are an excellent hedge against inflation as the value of the investment generally rises to match inflation. There are several ways to invest in TIPS, however investing through an ETF or a mutual fund is a very convenient and flexible way to invest in TIPS.
5. Dividend Growth Index Funds: Dividend paying stocks are a great way to get cash flow and investing in dividend paying stocks that also increases their dividends regularly (preferably to match inflation) is an excellent hedge to inflation.
6. Investing in Municipal (muni) bonds: Investing in muni bonds is a safe way to hedge against inflation. Typically, during inflation, taxes tend to rise as governments make attempts to cool off the economy. Most muni bonds have tax free (or low tax) returns and steady cash flow which makes them an excellent source of hedging against inflation.
7. Invest in I-Bonds: I-Bonds are safe treasury protected savings bonds that combine a fixed interest rate and an inflation rate to help you keep up with inflation. Unfortunately, however, you can only purchase a maximum of $10,000 of the I-Bond each calendar year.
Consult with your Financial Advisors before taking any of these steps.
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