What to Do When Inflation Comes Knocking
BOSTON (TheStreet) -- Inflation is a scary word.
From the local coffee shop to the Federal Reserve, its post-recession comeback has been much feared. Anyone who lived through the astronomical price jumps of the 1970s will likely tell you those concerns are well-founded.
|Inflation is knocking, but there are strategies that can hedge against rising costs and possibly even prove profitable.|
Like trying to push back a waterfall, it won't be held at bay forever. Already, inflation is making itself felt, creeping back into the economy even as consumers shell out more for gas and groceries.With, at the very least, modest inflation predictably on the horizon, retirees and pre-retirees typically have the most at stake. The former, living on fixed income, can ill afford more out-of-pocket costs for food, clothing and health care (including cost sharing in employer plans and Medicare Part B premiums). The latter, in a to-the-wire push to accumulate assets, may not relish the idea of their game plan being upset. Is there a way to make inflation work to your benefit? Are there financial strategies that can not only hedge against rising costs but even prove profitable? The good news is that inflation will possibly boost the value of your home, at least stanching the steady bleed of equity over the past few years. There are also specific tools for the job at hand. You can buy Treasury Inflation Protected Securities, better known as TIPS, directly from the Treasury Department. Various mutual funds, such as the Vanguard Inflation-Protected Securities Fund (VIPSX), offer another way to easily incorporate these instruments to your portfolio. To tackle inflation, one should understand the enemy. Inflation will likely trigger the chain of events that leads the Fed to drive up interest rates. Surveys have shown that many passive investors fail to realize the damage that can hit their bond holdings when this happens. Investors need "a clear understanding of the relationship between asset returns and inflation," a recent report from Vanguard suggests. "For those with long-term investment horizons, risky assets like stocks and bonds may earn returns high enough to overcome erosion in purchasing power due to inflation, on average. However, investors looking to hedge against inflation are typically concerned with short- and medium-term protection."
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