3 Tips for Guarding Your Money Against Inflation

By John Hagensen

Inflation may be creeping up on Americans, which could mean your investments and retirement savings wonΓÇÖt be worth as much as you hoped.

The average person doesnΓÇÖt spend a lot of time thinking about inflation, but it isnΓÇÖt something you can ignore if you hope to build a nest egg that can see you through hard times ΓÇô and retirement.

How significant is inflation?

I suggest thinking back to that time as a kid when you asked your grandfather to buy you a Snickers bar and he nostalgically replied that a candy bar only cost him a nickel back in his day. Today candy bars average about $1.50.

ThatΓÇÖs just one example of how what once would have seemed like a lot of money doesnΓÇÖt buy anywhere as much as it did in the past.

Inflation isnΓÇÖt accelerating dramatically ΓÇô at least not yet ΓÇô but it is on the upswing. In March, the consumer price index jumped to 2.4 percent, up from 2.2 percent a month earlier. Core inflation, which excludes food and energy prices, increased to 2.1 percent from 1.8 percent.

What does all this mean for your money right now? I offer three tips for anyone who wants to try to avoid the insidious creep of inflation:

• Avoid long-term bonds. The Fed has planned gradual interest-rate hikes this year, and rising interest rates mean falling bond prices. But not all fixed-income investments are created equal. The longer until a bond matures, the more drastic the decline will be as rates increase. For many, the plan to mitigate this ΓÇ£interest-rate riskΓÇ¥ consists of simply avoiding the urge to sell bonds on the secondary market at a loss. But thatΓÇÖs often nothing more than ΓÇ£jumping out of the frying pan and into fire.” Historically, your money has to double every 20 to 25 years to simply keep up with inflation. Therefore, you will likely find yourself disappointed by the purchasing power of your original bond investment when the principal is finally returned at maturity.
• Avoid long-term CDs. This should be intuitive. If inflation is occurring and interest rates are rising, then thereΓÇÖs little logic in ΓÇÿlocking upΓÇÖ your savings at lower rates than what you suspect will soon be available. If you are adamant about owning CDs in a rising-interest-rate environment, a laddering approach may be prudent. Even so, I advise staying short-term with maturity dates.
• Broadly diversify.┬áIf you have a long-time horizon, itΓÇÖs likely your asset allocation consists of equities. Inflation can have a relatively benign impact on your portfolio, assuming you maintain financial discipline during times of market fluctuations while possessing adequate cash reserves to cover short-term needs. If youΓÇÖre nearing or entering retirement and want a more predictable short-term approach, he says, it may still be prudent to diversify a portion of your portfolio into equities as a complement to your more stable asset categories.

Regardless of what your personal situation is, you canΓÇÖt ignore the fact that inflation has the potential to upset your carefully arranged financial plans.ΓÇ¥

John Hagensen is the founder and managing director of Keystone Wealth Partners (www.Keystonewealthpartners.com). He also is author of Unleash Your Investments and hosts a weekly radio show, Myth Busting with Keystone Wealth Partners. His vision in starting his firm was to deliver financial planning strategies free from Wall StreetΓÇÖs embedded conflicts of interest. Hagensen holds the credentials of Certified Funds Specialist, Certified Annuity Specialist, Certified Estate & Trust Specialist, Certified Tax Specialist and Certified Income Specialist. He also holds a designation from the National Social Security Association.