Inflation is an almost-silent eroder of your wealth. Inflation represents a rise in prices; it’s a decline in your purchasing power. One of the goals of your investing plan should be to beat inflation. Many estimates put average annual inflation over a long period of time at about 3% annually. This means that you need investing returns that will beat that. In many cases, cash products like CDs and savings accounts won’t help you beat inflation. If you want to beat inflation, here’s how to do it:
Capital Preservation: Keeping Pace with Inflation
In some cases, you might want some of your portfolio to do no more than keep pace with inflation. This will help you preserve your capital so that your buying power isn’t eroded, yet it will also help you keep from making risky investments that can result in big losses. Many people like to use TIPs and I-bonds for capital preservation. These are Treasury securities that are indexed to inflation and can help you avoid wealth erosion.
Beating Inflation: Earning Higher Returns
If you are interested in how to invest during inflation so that you beat it, you need a different plan. Stocks can be a good way to beat inflation, since they have a history of doing so over the long haul. Many investors like dividend stocks, since the real returns over time have often beat capital gains. Dividend stocks can also provide you with a source of income, or with a way to reinvest your earnings to boost your stock holdings. Either way, you can beat inflation while holding stocks that are likely to show stable growth over the years.
You can also beat inflation with the help of commodities. Hard assets normally do well during inflation, since they are priced in dollars. When dollar earning power is eroded, commodities are often seeing price increases. Choosing those commodities that are likely to be in demand for the long haul include copper, oil, and cocoa. Many people like gold as a hedge against inflation as well, or like silver, since it is priced lower but often moves in tandem with gold.
Building Some Cash Reserve
Even though cash won’t help you beat inflation directly, there is some use in building a cash reserve for investing purposes. You can save up some cash for use during times of market downcycle. When prices are low, you will be able to buy more. In the long run, this plan is a great way to beat inflation, since prices are likely to recover and grow your portfolio.
