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Each year it seems you need more money to pay for the same things, whether it’s a slice of pizza or bottle of aspirin. If your investments are going to help you achieve your financial goals, they have to beat inflation, the steady increase in the cost of everything.
Oil prices are down and interest rates remain low, but inflation is by no means conquered. The consumer price index (used to measure inflation), including food and energy, has risen 2.1% in the past 12 months, according to the Bureau of Labor Statistics. Has your investment portfolio kept pace? If the answer is no, then you might want to include these inflation hedges to your investment mix:
oooCommodities These include food, grains, and metals, which are interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts (an agreement to buy or sell a particular commodity on a predetermined date). The price of the commodity is subject to supply and demand. Rising inflation often goes hand in hand with higher prices for oil and natural gas. Farm products and industrial metals can also shoot up in price. Try investing in a mutual fund or exchange-traded fund (ETF) that follows an index of commodity prices.
According to Lee Baker, who heads Apex Financial Services in Tucker, Georgia, Oppenheimer Real Asset [QRAAX] is a solid fund. This mutual fund is designed to track the Goldman Sachs Commodity Index of wheat, metals, hogs, etc., and especially energy products. If commodity prices rise, so will the Index and investments in this fund. In November, Oppenheimer Real Asset had a five-year annualized return of 14.80%, which was 8.25 percentage points higher than the 6.55% return of the S&P 500.
Real estate Real estate is a proven long-term inflation hedge. “In addition to direct property investments,” Baker says, “our firm recommends American Century Real Estate Fund [REACX], which invests in commercial properties. If inflation picks up, those properties are likely to get rising rents from their tenants, which can be passed through to investors.” Again, real estate funds have been winners lately. The American Century entry has returned close to 25% a year for the past five years.
Inflation-indexed bonds TIPS (Treasury Inflation-Protected Securities) are designed to protect investors from inflation, says Kathy Williams, who has a financial services firm in Oklahoma City. “We include TIPS in our bond market allocations. These are Treasury bonds, so they have the federal government’s backing against any default.” The return comes in two flavors: a fixed interest rate set when TIPS are issued and a variable interest rate that tracks inflation. Say you invest in five-year TIPS when the fixed yield is 2.5%. If inflation stays around 3% a year for the next five years, your total return will be 5.5%: 2.5% plus 3%. But if inflation takes off and averages, say, 9% a year for those five years, your TIPS will provide a total return of 11.5% per year. You can buy TIPS from the Treasury