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Inflation Proof Investments

written by: Ashwin Satyanarayana•edited by: Jason C. Chavis•updated: 5/21/2010

Did you know that inflation happens to be biggest, scariest and most inevitable enemy your investments have to battle against to fetch you a decent return on your Investment? Inflation basically shears off any value you might hope to gain from investments. How to counter this? See these 3 top ways.

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    Given the way things are right now, I am sure you can even kill to see that your investments remain protected and not get washed away by the egregious ways of inflation which has this bad habit of nibbling away on your pillars of wealth. Here are some excellent investment vehicles which can protect your money to some ext whether there is recession or not:

    TIPS (Treasury Inflation-protected Securities): Treasury Inflation-Protected Securities, also called as TIPS are a special kind of U.S. government bonds which were first doled out in the year 1997. Being bonds being issued by the U.S Government itself, these bonds are highly rated and almost risk-free. Apart from that, their value goes up when inflation rises. TIPS come with the assurance that your value of the investment is not nibbled at by the inflation and hence you can secure your financial losses and save yourself from the loss of financial power. You must keep in mind that this increase in value is taxed. Although no one knows why, this investment is best suited for tax-deferred retirement accounts like IRA, Keogh or 401(k). I’d recommend you have about 10% of your investment surplus in this way and never trade these bonds since the TIPS can be very volatile in the short term.

    REITs: REITs (Real-Estate Investment Trusts), pronounced “reets”, work under the premise that the commercial rents of the properties always go up with inflation. Now, REITs are companies that collect rents from commercial property that have been leased out and when bundled with Exchange Traded Funds ( ETF) and Mutual Funds, they give a fairly good inflation cover. One of the popular funds in this category is the Vanguard REIT Index Fund. Even though it isn’t something you should bet all your assets on, it should still be an effective cover for you over long term and ensure that your nest egg isn’t shattered by debilitating loss of purchase power.

    Corporate Inflation - Adjusted Bonds: Inflation-Linked Corporate Bonds are a great new way to combat inflation and is even purported to be better than the TIPS mentioned above. According to the famous Bond Guru, Marilyn Cohen on, “Yields on corporate inflation-adjusted bonds are 0.4 percentage points over comparable Treasury for an A-rated bond. These spreads could widen a bit as the economy picks up steam, but the risk is small enough that I would not wait to go into the corporate bonds.” Marilyn has explained how this works beautifully and I thought it would be best if I quote Cohen here:

    “Household Finance, now a subsidiary of the huge bank HSBC, issued inflation-adjusted bonds in November carrying an initial coupon of 4.49% and maturing Nov. 10, 2013. The 4.49% consists of two pieces. One is an inflation adjustment of 2.32%, equal to the then-trailing 12-month increase in the cost of living. The other component is the real coupon, which stays constant at 2.17%. This is a non-callable bond. At the time of this new issue, conventional ten-year non-callable Household Finance bonds were yielding 4.89% or 0.4 points more than the inflation-linked kind. The reason: The holder of a conventional bond is taking the risk of getting chewed up by unanticipated inflation. The holder of the 2.17% self-adjusting bond is not.”