Finding A Hedge Against Inflation

If you're looking for a hedge against inflation, you will want to search for investments that either have high enough returns that they outweigh the effects of inflation or are geared to compensate for inflation. In times of low inflation, inflation protection has been considered pointless, but people on a fixed income-retirees in particular-may benefit from investments with inflation protection because they need to take advantage of any way to increase their assets in relation to inflation in order to protect their purchasing power.

Inflation And Your Investments
Let's say you have an investment in a fund that pays out 12% each year. If inflation is 3% that year, your return is really only worth 9% in purchasing power. If you invest in Treasury Inflation-Protected Securities-referred to as TIPS-your payments will be adjusted to reflect inflation as measured by the Consumer Price Index or CPI. The question is this: Will you get a better return with the regular investment or the TIPS? It really depends on how high inflation is that year and how good the returns are on your investments.

Your Investment Options
But what about investments in general? What investments tend to be safer from the ups and downs of the market? And what about the trillions of dollars the US government is pouring into the economy? If that decreases the value of the American dollar and makes the US economy weak in comparison to our neighbors across the globe, what's an investor to do?

Investing in commodities is considered a safe hedge against inflation. For example, gold is a universal currency, valued around the world because it is rare and precious. The same goes for oil, natural gas and other precious metals. While prices may dip down and zoom up here in the United States in response to inflation, unemployment rates, the banking crisis and other economic firestorms, gold, oil, natural gas and precious metals usually retain relative value through all the storms. By investing in commodities that are high in demand and low in supply, you'll have a solid long-term investment that can hold its own against market volatility.

Investment Risk Versus Inflation Risk
However, keep in mind that all investments involve risk, so the past stability of commodities is no guarantee of the future. But, the alternative is not investing at all, and, if you just let your money sit there, it will actually lose value thanks to inflation. For that reason, finding a hedge against inflation that works for you-no matter what it is-is a good call.