If you don't properly adjust your investments during periods of dollar devaluation, your portfolio's return could be badly damaged by the effects of inflation. this is a result of too much money chasing too few goods. Prices will rise in the economy, and the value of a dollar will decrease. This is why inflation is also known as dollar devaluation. To protect yourself during periods of inflation, you need to avoid cash or investments based on cash, like stocks or bonds, and put your investments in assets that will retain their value.
Buy funds that hold gold and other precious metals. Precious metals hold there value during dollar devaluation and are a solid hedge against inflation. It is better to buy gold mutual funds over buying straight gold because there is a better market for trading mutual funds.
Invest in foreign emerging markets either directly or through American Depository Receipts, American funds designed to invest in foreign markets. This will move your portfolio out of American dollars and into other currencies.
Buy the stock of blue chip, international companies. Companies that have divisions all over the world will be less damaged by American inflation than companies who only do business in America.
Buy Treasury Inflation Protected Securities. These government bonds adjust their interest payments as inflation rises. This protects your return from being eroded by inflation.
Avoid buying fixed-income securities like bonds. They pay a fixed percentage of interest each year. If inflation rises to a level above the interest payments, your bonds will drop sharply in value.
Do not hold money in cash or money market accounts. The value of these accounts will decrease each year by the amount of inflation in the economy.
- “Fundamentals of Investments for Financial Planning”; Walt J. Woerheide; 2008
- Market Folly; Best Investments During Inflation; August 2010
- Journal of Economics, Business and Management, Vol. 3, No. 7, July 2015. "An Examination on the Determinants of Inflation," Page 678. Accessed March 19, 2020.
- U.S Census. "Median and Average Sales Prices of New Homes Sold in United States," Accessed March 19, 2020.
- U.S. Energy Information Administration. "Short-term Energy Outlook: Real Prices Viewer." Select "imported Crude Oil Prices," Select "Monthly." Download Excel Spreadsheet. Open tab titled "Crude Oil-M." Use second column "Imported Crude Oil Price Nominal." Accessed March 19, 2020.
- Office of Energy Efficiency and Renewable Energy. "Historical Gas Prices," Accessed March 19, 2020.
- Federal Reserve Board of Governors. “What Are the Federal Reserve's Objectives in Conducting Monetary Policy?” Accessed March 19, 2020.
- Federal Reserve Bank of Cleveland. "Inflation 101," Accessed March 17, 2020.
- Avoid buying fixed-income securities like bonds. They pay a fixed percentage of interest each year. If inflation rises to a level above the interest payments, your bonds will drop sharply in value.
- Do not hold money in cash or money market accounts. The value of these accounts will decrease each year by the amount of inflation in the economy.
David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.