There’s No One Way to Make Your Investments Inflation-Proof

There’s No One Way to Make Your Investments Inflation-Proof

Inflation is at a 40-year high, and as rising prices threaten the purchasing strength of assets, investors are scrambling to protect their portfolios. But there’s no one perfect way to do that, contends an article in The Wall Street Journal, which lists four major options depending on an individual’s situation.

Social Security. Delaying Social Security benefits is an uncomplicated way of boosting inflation-proof retirement income. Retirees would have to dip into their investment portfolios earlier to support themselves, but since the S&P 500 is up 76% since 2020, it’s a good time to sell stocks. Anyone between the ages of 62 and 70 can start their SS benefits, but for every year you delay, the payment increases. This year, for example, the increase was 5.9% because of the rise in 3rd-quarter inflation. That’s the largest jump since 1982. However, keep in mind that the delay really only pays off the longer you live; if you delay from age 62 to 70, you’d need to live to be 80.5 years old to come out ahead.

I Bonds. These inflation-protected U.S. savings bonds offer a fixed rate for up to 30 years, plus an inflation rate that adjusts semiannually. Currently, the yield on a regular U.S. 30-year Treasury bond is 2.24%, while the I bonds’ annualized yield is 7.12%. While I bonds won’t outrun inflation, they still have an advantage over conventional Treasury bonds, which are now negative factoring in inflation. However, an investor can only buy up to $10,000 per year and are not allowed to cash them in for at least 12 months. Additionally, investors lose 3 months’ interest if they redeem the bonds within the first 5 years.

TIPS. Treasury inflation-protected securities (TIPS) do well when inflation leads beyond predictions and ordinary bonds get clobbered. TIPS are backed by the U.S. government and adjust to stay on track with the CPI. With inflation expected to average about 2.46% over the next 10 years, TIPS would do very well if the CPI also averages more than 2.46% over the same length of time. But if inflation is below that number, the conventional Treasury will beat the TIPS. Last year, TIPS saw a 6% return as inflation soared, but with interest rates rising this year, that, as well as a sharp decline in bond prices, could pose a risk factor. One expert interviewed for the article, Christine Benz of Morningstar, suggests putting 10-20% of a fixed-income portfolio into TIPS, which can be purchased directly through

Stocks & Commodities. Some analysts suggest shifting money from the lowest-performing sectors during a period of inflation, such as auto makers, and favoring energy and natural-resource stocks instead. In addition, commodities such as metals, oil, and agricultural products usually hold onto their value and do well even during inflationary periods. However, because commodities can also have big ups and downs, cap exposure at 3% or less, says Amy Arnott, a portfolio strategist at Morningstar. One commodity to be wary of is gold; while it’s kept up with inflation over long periods, it’s too volatile to be reliable, the article concludes.