Inflation can quickly erode the buying power of your hard-earned money. To stay ahead of inflation in 2023, you’ll need to employ a plan that can help you protect your finances and grow your wealth. Here are some effective tactics to help fight inflation.
Invest in Dividend-Bearing Stocks, Mutual Funds, and ETFs.
Investing in dividend-bearing equities is one of the best ways to combat inflation. While dividend stocks have traditionally seen below-average returns during periods of higher inflation, this is offset by the fact that companies pass on higher prices and wages to consumers. This helps to increase their revenue and earnings over the long term and thus pay out higher dividends. According to Fidelity and Morningstar research, dividends have accounted for 40% of stock market returns since 1930 and 54% during high-inflation decades!
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With a dividend-bearing portfolio, you can use the regular payouts to reinvest into the same underlying asset, resulting in compound gains that start building on each other. These investments tend to be less volatile than those without dividends, making them attractive for investors seeking safety during market turbulence. Your money is working FOR you, not the other way around!
Invest in Anti-Inflation Assets
Investing in anti-inflation assets such as Treasury Inflation-Protected Securities (TIPS) and commodities is one way to guard your wealth against inflation. TIPS have a built-in interest adjustment that allows them to maintain their value with inflation. Commodities such as gold and silver have historically proven to be a hedge against inflation. Investing in these vehicles will help ensure that your money retains its buying power over time.
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Although investing in anti-inflation assets can protect you from inflation, they also come with risks. For example, TIPS may not provide enough cushion to offset the full effects of inflation, and their income may push you into a higher tax bracket. Similarly, investing in commodities like gold and silver can be risky since their prices often fluctuate together with the stock market. It’s essential to research the pros and cons of each before deciding which, if any, to invest in.
Purchase Series I Savings Bonds (Treasury I Bonds)
I Bonds are United States Treasury bonds specifically designed to protect your money from inflation. I Bonds are purchased at a set dollar amount and earn interest semi-annually. The rate you will receive is determined by the inflation-adjusted fixed rate of the bond. As the cost of living increases, so do the returns on your I Bond investments. You can redeem I Bonds after 12 months, but if you do so in less than 5 years, you forfeit the last 3 months of interest.
With current I-bond rates of 6.89% and inflation projected to decrease in the coming months due to the Fed increasing interest rates, current holders of I Bonds may be on track to protect their funds and potentially make something on top.
Invest in Real Estate
Investing in real estate, whether purchasing a home or a buy-to-rent property, is an excellent way to grow your wealth and protect it against increasing prices. By buying a home, you are paying a fixed mortgage over the life of the loan – as inflation eats away at your dollar’s value, you still pay the specified amount of dollars, regardless of the actual value of those dollars. Renters are on the other side, as they typically see much higher rents over the same period. Inflation is a boon for the owners of apartments, multi-family complexes, or any other housing units they rent out.
Build an Inflation Fighting Portfolio
These aren’t the only ways to hedge against inflation, but these are some of the fundamental tactics that can form part of an overall comprehensive inflation-fighting strategy. How they all come together is a gargantuan task, fraught with complexities requiring extensive research and mastery.
A financial advisor has the knowledge and experience to create a customized plan that will not only fight inflation but also reduce your lifetime tax bill, maximize your returns and provide the necessary flexibility to change life situations.
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