Investing: TIPS to Beat Inflation

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Wed, Jan 28 - 8:50 am EDT | 6 years ago by
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Right now, deflation is a concern for the economy. Prices are falling and credit is restricted. However, the government is on the verge of a massive economic stimulus package, and that means that more money will be injected into the system. More money means that the value of your dollar — its purchasing power — is reduced. When we start getting flooded with dollar, it means inflation is a very real possibility.

Protecting yourself from inflation with TIPS

If you want to preserve your purchasing power, you can make investments that protect against inflation. One of those investments is in Treasury Inflation-Protected Securities (TIPS). These represent government debt (and there will be plenty of that to go around soon) that is guaranteed to keep up with the rate of rising prices. Your return is guaranteed to keep up with inflation so that your buying power isn’t eroded.

Of course, the yield is still pretty low, keeping you about even, but at least you aren’t losing anything. Another government debt vehicle that protects against inflation is the I-bond. Remember, though, that any investment carries risk. Even though government debt is considered “safe”, there is still the chance of default. If you feel like the U.S. government (and state and local governments) is likely to collapse and default on its debt, bonds are not for you.

If you are more adventurous, many people use commodities — especially gold — as hedges against inflation.

You can find out more about TIPS and invest in them at TreasuryDirect.

Disclaimer: I am not a financial or investment professional. Any information you get from this site is not intended as advice. It is likely to be incomplete, and it may not apply to your individual circumstance. With investment, there is always the risk of loss. Do your own research, consider your situation and/or consult a professional before making money decisions.

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  • Millionaire Acts

    Nice tips! The best part to beat inflation is to invest in an investment vehicle where the return rate is higher than the inflation rate.

  • miranda

    Great point. Many people are just trying to preserve capital right now.

  • Derek

    Preservation of capital is extremely important right now. It’s too bad the biggest inflationist in the world, Peter Schiff, wasn’t able to preserve most of his clients’ capital. There should be an interesting article about that in the WSJ tomorrow, hopefully.

    BTW, you’re wrong about inflation. Inflation is NOT an increase in the money supply. Look at some charts and you’ll notice that there’s often little correlation. Throughout the Great Depression, the increase in the money supply was extraordinary, but where was the inflation?

    Inflation relies on increases in the supply of money AND CREDIT. The people that are screaming that inflation is coming are the same people that either:

    a) didn’t see the financial crisis coming, and/or
    b) were dead wrong on predictions when it did come

    Inflation is not coming, and buying government debt (i.e. TIPS) is an awful idea as well, for the following reasons:

    - It allows our government to keep spending their way into oblivion, despite the fact that the economic crisis was CAUSED by excessive debt

    - It’s very possible that our government will have to default on much of its debt, and it has proven itself very unfair when picking winners (bankers) and losers (taxpayers). There’s already a huge treasury bubble and watch what happens when it pops.

    That’s why anybody that recommends municipal bonds is a moron…because many states won’t be able to pay the debts. We may have a currency crisis in the future, but all the signs are pointing to a long period of severe deflation.

  • miranda

    Thank you for sharing your opinion. The lovely thing about money is that it — like politics — provides the room for a variety of viewpoints. I think inflation is a very real possibility, and I was warning about the financial crisis before it came. With all the money being tossed around, and with the fact that our leaders will do what they can to get people borrowing again, inflation is definitely a real possibility.

    You are right to point out that government debt does have its risks (as does any investment), and that it is a possibility that the government could default.

  • Chuck Kimber

    You investment strategy is noted, but in my humble opinion, it is misguided.
    It is my belief that the well of public debt financing with Treasury bonds is about to come to an end. I trully believe the bond market will soon falter as foreign investors (China, Japan, Middle Eastern Countries, etc. are learning that the US cannot continue to guarantee the preformance and safety of the dollar and US Bonds.
    The new administration is already busy making enemies in China by accusing the Chinese of manipulating their currency, and being generally rude to those who buy our debt that we use for financing bailouts and the like. Besides, these countries will soon discover that they need their cash to prop up their own faltering economies.
    When they stop buying US bonds the US government will have no where else to turn to raise desperately needed infusions of wealth, as the bond markets falter and sputter to a stop.
    The results will be the complete abandonment of the bailouts, and the general freezing up of all spending programs for the Federal government, as well as States, Coutnies, and Cities, many of whom are already in financial troubles.
    So, maybe directing people toward bond’s as a safe investment tool is a mistake. One should really re-think the safety of these instruments first.

  • miranda

    Thank you for sharing! My point was to share one investing strategy with readers — taking care to point out that there is always risk involved with investing and that there is no truly “safe” investment. (I have, in the past, shared other investment ideas. This is by no means the only or the best.) All investment carries the risk of loss, as I clearly state in the post — even investments considered “safe”.

    Your assessment of the politics that could affect this relationship have very real merits. You are right that China has no real need for concern regarding what the U.S. wants, and, from a purely financial standpoint, it is foolhardy to antagonize the country. But I think that there is a long way to go before China abandons us.

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