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Surging inflation has become a hot topic recently, especially for those approaching retirement. As D. Paterson Cope explains, inflation not only results in the cost of goods increasing, it also must be considered a hidden tax.
This is because as inflation rises, the purchasing power of your money erodes. This can cause an extremely tenuous situation for retirees, who could all of a sudden see their retirement savings not be worth as much as they were not long ago.
Luckily, there are a number of safe havens that offer solid hedges against rising consumer prices. Here are three investments that can help protect your money from inflation.
1. Commodities
Commodities is a broad term that can describe everything from foreign currencies to utilities such as oil, electricity and natural gas, to consumables such as orange juice, beef and grains, and even precious metals.
Many professional investors treat commodities as an indicator for when inflation is about to happen. When a commodity's price increases, so, too, does the cost of the end-products the commodity is used to create.
Investing in individual commodities can be risky, though, as not all commodities will increase in price as inflation rises. A good alternative is to invest in commodities through ETFs, or exchange traded funds. This allows you to invest broadly in commodities so as to spread out your risk.
2. REITs
As many people know, when inflation increases, the price of homes and rents tend to increase as well. This is why investing in a REIT, or a Real Estate Investment Trust, is often considered to be a solid hedge against inflation.
When you invest in a REIT, you're investing in a company that operates and owns real estate that produces income. REITs typically own multiple real estate properties that earn income, and people who invest in them are typically pay dividends.
There are obvious downsides to REITs. As interest rates increase, share prices of REITs can decrease as Treasury securities become more attractive. And, since interest rates generally increase as inflation increases, this is a possible risk.
3. S&P 500 Index Funds
Investing heavily in stocks is certainly not a winning strategy during inflationary periods. However, if you invest wisely in the right stocks, it could be a great hedge against inflation.
Instead of investing in individual companies, you could opt for an index fund, which tracks the performance of an entire stock index. During inflationary periods, companies that typically do well are those that don't require a lot of capital.
As D. Paterson Cope explains, communication and technology businesses fall into this category, which makes the S&P 500 an attractive index. Those type of companies currently comprise about 35% of the S&P 500, making an index fund for this stock index a viable inflation hedge.
About D. Paterson Cope
D. Paterson Cope, CFP® is the founder and CEO of Cope Private Wealth, a financial planning and wealth management firm specializing in assisting retirees and people who are about to retire. D. Paterson Cope has been providing financial advice for more than 30 years. He first earned the designation of Certified Financial Planner (CFP) in 1997. When he isn’t working, he enjoys spending time with his wife, Jennifer Miree Cope, and the rest of his family in Mountain Brook.
