Unfortunately, inflation is a constant in the U.S. economy. Though it may slow in times of recession, inflation will steadily eat away at investment gains unless an investor takes specific steps to hedge against the devaluing dollar. There are several strategies to hedge against inflation, and, while no investment is perfect, the following actions will help protect a portfolio from devaluation in times of high inflation.
Invest in Gold
Gold has consistently maintained its value in terms of real, inflation-adjusted dollars over time. Investing in gold may not make much of a profit, but it will protect an original investment from losing its value in a high-inflation environment. For this reason, the price of gold frequently skyrockets when inflation is on the rise. It is possible to buy gold through mutual funds, though you could also physically purchase gold to keep yourself.
Invest in Commodities
Other than gold, commodities such as oil or agricultural products frequently are good investments in times of high inflation. Because the price of the underlying commodities will rise in nominal dollar terms as inflation rises, the investment is protected against inflation. The easiest way to invest in commodities is to invest in a commodities mutual fund.
Invest in Foreign Currencies
Buying foreign currencies is riskier than buying gold or other commodities, because other nations are not immune to inflationary pressures. However, for the savvy investor willing to do some research, currency arbitrage may be a good investment strategy. There are two keys to successfully buying foreign currencies to hedge against inflation. First, seek out nations with low inflation outlooks, otherwise the investor’s foreign currencies will simply lose value just as the dollar would. Second, buy the currency of countries that have floating exchange rates with the dollar. That will allow the foreign currency to appreciate against the dollar, protecting the investment from inflationary losses.
Invest in Treasury Inflation-Protected Assets (TIPS)
Unlike the previous three strategies, which generally involve taking investments out of the U.S. dollar, investing in treasury inflation-protected securities (TIPS) is a way to protect your investments in times of high inflation, while keeping investments in the dollar. These TIPS bonds are issued by the U.S. government, and their interest rates are tied to the current rate of inflation. Thus, as inflation rises, the yield on TIPS investments rises as well, protecting the investor’s assets from being devalued by inflation. TIPS may be purchased individually or through a mutual fund.