There are a lot of positives in economic growth, but one downside is the inflation that sometimes comes with it. An increase in the GDP rate, consumer prices and, inevitably, interest rates often follow as well.
In recent months, we’ve seen a jump in gas rates; home prices are rising at the quickest pace in nearly 10 years; and the rising cost of medical care — which had slowed down until this year — is back on the ascent. While today’s global markets and automation technology help keep price increases down on most consumer goods, inflation can still impact the long-term purchasing power of a conservative retirement portfolio.
That’s why some investors incorporate securities touted as “inflation busters” because they can provide ongoing income growth but are still considered low-risk instruments. Inflation-busting portfolio options could include:
- Treasury inflation-protected securities (TIPS) — Government-issued bonds that adjust principal value each month to align with inflation (or deflation).
- Floating-rate fund — This type of fund typically invests in variable rate bank loans issued to companies with substandard credit ratings. Because the interest rate adjusts according to a short-term benchmark, they offer ongoing income opportunity.
- Stocks as an asset class have historically outpaced the rate of inflation in the long haul. Yet some sectors weather an inflationary environment better than others. For example, the energy, industrials and materials sectors generally outperform more interest rate-sensitive sectors such as utilities and telecommunications during periods of rising inflation.
- Real estate has long been recognized as an inflation hedge, but some retirees don’t want to get into the business of being a landlord. One way to potentially reap the gains of real estate income without a direct investment is to explore the benefits and risks of a real estate investment trust (REIT), REIT mutual fund or REIT ETF.
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