While inflation has steadily decreased from its 40-year high of 9.1% in June, one thing is clear: Inflation is still something to worry about.
From 1914 to 2021, the historical average of the U.S. inflation rate has been 3.24%. I looks pretty low, but if inflation would be at the historical average of 3.24% for 5 years, what used to cost $1,000 would then cost $1,172. You would need 17% more money to buy the same goods and services. At the current 7.7% inflation, you would need 45% more money after just 5 years.
To protect yourself against inflation you have to take a few steps. First of all, you have to know, what part of your assets you are protecting. Cash or short-term holdings are very different from your longer-term investments. Below are a few ideas how you could act:
1. Long-Term Funds
For your long-term funds, consider Perpetual Dividend Raisers. These are stocks that raise their dividends every year. With Perpetual Dividend Raisers, you are constantly growing your income, and if the dividends are increasing at a higher rate than that of inflation, you are actually boosting your buying power. Consider companies that have a track record of annual dividend hikes that continually rise by a meaningful amount. Example: Enbridge has raised its dividend every year for 26 years. Over the past 10 years, the compound annual growth rate of the dividend is 10.9%. This will usually keep you well ahead of inflation.
2. Intermediate Term
For the intermediate term look at interest rate investments that are linked to inflation such as the US government bonds Series I whose interest rates reset every six months according to inflation. The current rate, just announced earlier this month, is 6.9%. You cannot cash out of the bond within the first 12 months. If you sell before five years pass, you lose three months’ worth of interest. These bonds will keep pace with inflation, protecting your funds. This is a good strategy to hedge against inflation without risk, as long as you don’t need the cash within 12 months.
3. Short Term
This one is tough one and you probably can just lower the damage. There is little adequate inflation protection with a short-term investment. Interest rates on money market accounts and certificates of deposit (CDs) are just too low. At this moment, look at Treasury Bills for your short-term money. Treasury bills earn nearly 3.6% annualized on Treasurys maturing in 4 weeks, 3.8% in 8 weeks, almost 4.1% for 13-weeks and 4.4% on Treasurys maturing in 26 weeks. T-bills are liquid, so you can sell them anytime and get your money immediately with no penalty.
With continuing high inflation, the most important financial step you can take at the moment is to ensure that your buying power is not destroyed over the next few years.
Sven Franssen