Five Ways to Keep Inflation at Bay

Here is an interesting article from Businessweek that I am just summarizing here.

Five ways that investors can protect their portfolios from the harmful effects of inflation are:

1. Treasury Inflation-Protected Securities
Treasury Inflation-Protected Securities, or TIPS, were created in 1997 to enable investors to avoid having the real returns on their bonds eroded by rising inflation and interest-rate levels. The coupon on the bonds is fixed, but investors get an extra kick: The principal amount on TIPS is increased periodically to keep pace with changes in the Consumer Price Index, or CPI. Its interest payment is calculated on the inflated principal, which is eventually repaid at maturity. The yield to maturity on the the 10-year TIPS is 2.71%.

2. TIPS Bond Funds

One disadvantage of owning TIPS individually is that investors are taxed on any increase in principal as if they were receiving it today, even though they won't realize that income until the bond matures, says Matthew Tucker, who heads the investment solutions group at Barclays Global Investors. Investing in bond funds allows people to receive their income in the same tax period in which they're being taxed on it.

3. Laddering Bonds

Apart from TIPS, if you're investing in individual bonds and have some concerns about inflation, the recommendation is to stay short in duration. One way to do that is to buy what's called a "ladder" of individual bonds that mature at different intervals over time.

4. Commodity-based Stocks and Funds

Investors can also hedge inflation by betting on stocks of companies that hold reserves of commodities whose prices you believe will continue to rise.

5. Closed-end Funds

There are also several closed-end funds whose primary objective is to maximize income and capital appreciation over time.


I personally prefer would prefer commodity-based stocks although if I can achieve a 10% return over 12-18 month horizon, I dont see how inflation would affect me so long as I reinvest the gains.