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How To Hedge Your Investments For Inflation

By Jason Markum

Inflation can really destroy the value of your investments, and yet I find that most people have never even heard of inflation before and if they have heard about it, they don’t really understand what it is.

So in this article I’m going to spend a little bit of time explaining the concept of inflation and telling you why it can destroy the value of your investments (whatever your investments are – retirement investing, college investing, whatever) and then I’ll give you some tips that you can use to make sure that inflation doesn’t hurt you – or at least, doesn’t hurt you quite as bad!

First off, what is inflation. Inflation is a term we economists use to describe the general price level of everything increasing.

Here’s a example…do a quick list in your head of everything you spend money on in any given year. You know, rent or mortgage, utilities, insurance payments, food, clothes, gym memberships, car payments, spending money to go to the movies and out to dinner….think of everything you spend money on.

Let’s pretend that you spend about $50,000 a year on everything.

Now let’s think about NEXT year. If you buy basically the same things next year, you can expect to pay more than $50,000 because the price of things goes up from year to year. THAT’S inflation…it’s that general increase in the price of…well, everything as time goes on.

As time goes on, the same amount of money buys you less stuff…that means that as time goes on, your money becomes worth less and less….that’s DEVASTATING to an investment account. Let’s say you set aside $10,000 this year. In only one year, that $10,000 will be worth LESS than it does today! Sure, it increases if you invest it, but let’s say it increases to $11,000 in one year. If inflation has also increased by 10% (which is high) then even though your investments have gone up to $11,000, it hasn’t REALLY gone up because inflation turns that $11,000 into only $10,000

Why? Because next year $11,000 will only buy you the same amount of stuff as $10,000 did last year, because the cost of everything has gone up too.

So how to you stop this from killing your investment account? Several ways.

One, invest in real assets like real estate and gold because these things usually increase faster during times of high inflation.

Two, invest in TIPS, which are US Treasury bonds that increase at the same rate as inflation each year, in effect hedging you from inflation.

Three, use options to hedge against inflation. This is WAY beyond the scope of this article, but you can do your own research on it to learn more.

There you have it, three ways to hedge yourself against inflation. Inflation is a terrible fact of life, and with our soaring budget deficits in the US, you can probably expect inflation to shoot up much higher in the years to come as a simple fact of life.

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