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4 investing strategies to help hedge against inflation

What we'll cover

  • Treasury Inflation Protected Securities

  • The value of a diversified portfolio

  • Investing alternatives to consider

If you've been concerned about inflation over the past couple of years, you're certainly not alone. While inflation is a natural occurrence, it's also natural to be nervous about its effects on your portfolio.

Inflation is when the prices for goods and services increase over time, which results in a decrease of a dollar's purchasing power. Here are a few strategies you can use to try and protect your investment portfolio from inflation.

1. Invest with TIPS

Treasury Inflation Protected Securities, or TIPS, are treasury bonds that help investors ride out waves of inflation over time.

TIPS' principal is tied to changes in the Consumer Price Index, which is a common measurement of inflation. TIPS' principal increases with inflation and decreases with deflation. TIPS pay interest at a fixed rate twice per year based on the adjusted value of the principal.

TIPS are some of the safest ways to invest against inflation because they're government-backed bonds. So no matter how inflation moves, the risk of losing money is less than other investments.

TIPS are government-backed bonds, so no matter how inflation moves, your risk of losing money is less than with other investments.

While inflation is a natural occurrence, it's also natural to be nervous about its effects on your portfolio.

2. Diversify with the right stocks

You can strategically use stocks as a hedge against inflation. For instance, it may make sense to invest in companies that can raise their prices with the rate of inflation (like ones in the consumer staples sector). This can help them potentially maintain a stream of profits, benefitting your portfolio, if the company pays dividends to shareholders.

Similarly, if rising prices push you to spend less on nonessentials, for instance, defensive stocks that represent consumer essentials, like food and energy, might be a good play.

During the early stages of a recession, defensive stocks can rise as people focus spending on necessities. As a recession eases, and inflation along with it, some investors may reallocate to cyclical stocks (those that represent companies with discretionary goods and services, like hotels and restaurants). These investments tend to outperform in strong economies.

You might also consider looking to international and emerging markets. When inflation is confined to one economic ecosystem, i.e. the United States, investing globally in high-performing companies could help balance out lagging returns.

3. Explore alternative assets

A diverse portfolio goes beyond investing in a variety of stocks and bonds. Other assets, including real estate and precious metals, may help add additional inflation protection.

Real estate can hedge against inflation and even be a potential earning opportunity. If the price of real estate goes up, there's potential for greater resale value down the line.

You have several choices when investing in real estate :

  • Direct ownership in which you own property and rent it out to tenants. Your profit margin assumes the cost of maintaining the property doesn't outpace the rate at which you increase rents.

  • Indirect ownership through a real estate investment trust (REIT) or a real estate fund. REITs are legal entities that own and invest in real estate, while real estate funds are mutual funds that may contain REITs, REIT indexes or funds, and possibly stocks of companies in the real estate industry.

Precious metals, such as gold, have also long been used as a valuable inflationary hedge. Gold tends to hold (or gain) value better than other investments during periods of higher inflation. An easy way to access gold or other precious metal investments is through an exchange-traded fund (ETF).

Gold ETFs can offer the benefits of gold investing in a highly liquid package. You can invest in gold ETFs through an online brokerage, like Ally Invest .

4. Assess and rebalance as needed

As the rate of inflation fluctuates, it's a good idea to keep an eye on your existing investments and how they are performing. Different companies and asset types may react to an inflationary environment in various ways, which could throw your portfolio balance off track. Rebalance as needed to make sure your mix remains in line with your long-term goals.

Taking the steps to protect your portfolio

It's important to remember that inflation (and its fluctuation) is normal. By building your portfolio around assets that offer some insulation against the impacts of rising prices and adjusting it as needed, you can help keep the effects of inflation on your wallet at bay.

Before you invest, you should carefully review and consider the investment objectives, risks, charges and expenses of any mutual fund or exchange-traded fund (ETF) you are considering. ETF trading prices may not necessarily reflect the net asset value of the underlying securities. A mutual fund/ETF prospectus contains this and other information and can be obtained by emailing

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