The Lazy Investor’s Guide to Beating Inflation
Inflation erodes purchasing power over time, meaning retirement savers need to put together strategies to beat inflation as they build their nest eggs.
When it comes to fighting inflation, the best advice is to work smart, not hard. Some of the most effective self-defense strategies are passive strategies that you can develop and do yourself. Here are some of the most effective ways to stay ahead of price increases.
1. Treasury-inflation-protected securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) are Treasury bonds that peg their value to the consumer price index to maintain their “real” value. This means that the biannual interest payments these bonds pay are also adjusted, as they are based on an inflation-adjusted principal.
Even though inflation can erode the purchasing power of a typical bond, the adjustable nature of TIPS preserves your principal investment. When the bond matures, you will receive your original principal or the inflation-adjusted amount, whichever is higher.
You can opt for a low-cost TIPS exchange-traded fund (ETF) if you want inflation protection without having to buy Treasuries yourself.
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2. Assessment of pricing power
Inflation forces companies to pay more for materials, components and labor to produce their products. Unless they can raise their prices to compensate, this destroys the profit margin. For investors, this can hurt the stock’s value and reduce the dividends they can expect to receive.
Businesses with strong pricing power are those that have incomparable demand – that is, people will buy them even if the price goes up. Sectors such as the consumer base and certain areas of technology and infrastructure industries are enjoying pricing power to offset their rising costs.
Invest in companies that provide goods or services that people need to buy to protect themselves from inflation. You can get broad exposure to companies with strong value creation by investing in ETFs that focus on these sectors.
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3. Automatic dividend reinvestment
Even in times of high inflation, dividend growth tends to outpace that inflation. Make those returns work for you with automatic reinvestment. Called a dividend reinvestment plan (DRIP), this strategy involves using dividends to automatically invest in whole or part of stocks.
Make sure your income is set up to reinvest earnings so you can compound your gains easily and stay ahead of inflation. Most brokers and retirement plan providers make it easy to set up a DRIP. When you log in, look for the option to reinvest shares across your portfolio or enable it for each fund, depending on how yours is managed.
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4. CD Ladder
To fight inflation, the Federal Reserve raises interest rates. While this may be painful for borrowers, there is a silver lining for savers: higher interest rates on various types of savings products.
Keep your money in high-interest certificates of deposit (CDs), which give you a fixed, guaranteed interest rate when you roll over your money until maturity.
A CD ladder delivers the best combination of yield, Federal Deposit Insurance Corporation (FDIC) protection and flexibility. Build one by opening a series of CDs with titles of varying maturity. Amazing rollover dates ensure you’ll have quick access to at least some of your emergency cash while still earning a yield that beats inflation.
