Inflation gradually eats away at your wealth, reducing your purchasing power as prices increase. To counter this, your investment plan should aim to outpace inflation, which typically averages around 3% per year. Traditional cash-based investments like CDs and savings accounts often fall short in achieving this goal. So, what’s the best way to manage your investments to withstand inflation? Here are some tips:
Protecting Your Capital: Keep Up With Inflation
Sometimes, your main objective might be to ensure that part of your portfolio keeps up with inflation to preserve your capital. This strategy helps maintain your spending power without taking on risky investments that could lead to significant losses. Treasury-protected securities, such as TIPs (Treasury Inflation-Protected Securities) and I-bonds, are popular options for preserving capital. These securities adjust for inflation, helping to safeguard your wealth from gradual erosion.
Outperforming Inflation: Aim for Higher Returns
If your goal is not just to keep up with inflation but to surpass it, you’ll need a different approach. Historically, stocks have consistently outperformed inflation over the long term. Dividend stocks are particularly advantageous, often delivering better returns over time compared to capital gains. These stocks can provide a steady income stream or can be reinvested to increase your stock holdings. This strategy can help you beat inflation while accumulating stocks that have a high potential for long-term growth.
Investing in commodities is another way to combat inflation. Commodities, which are priced in dollars, tend to do well as the value of the dollar falls. Assets like copper, oil, and cocoa are often good choices for long-term demand. Gold is also favored as a hedge against inflation, while silver is an attractive option due to its lower price and tendency to move in tandem with gold.
Building a Cash Reserve
Although cash by itself won’t help you outpace inflation, having a cash reserve for investment purposes can be very beneficial. It allows you to take advantage of market downturns by buying more when prices are low. Over time, this approach can be effective in fighting inflation, as prices are expected to bounce back, thereby increasing the value of your portfolio.