Money & Investing - Banks.com

One of the ways to protect yourself from inflation is to invest in Treasury Inflation Protected Securities. These are government bonds that adjust their returns to the rate of inflation. This is one way to preserve your capital and protect against inflation. Interestingly, there are plenty of experts who believe that including TIPS (perhaps in the form of an ETF) in your retirement portfolio is a good idea. This way, at least part of your retirement earnings are protected from inflation and in reasonably safe investments. Here is what ETF Database points out about mitigating inflation risk in the long term:

I have no idea whether inflation or deflation is the larger risk in the short term. I am however fairly sure that over a 20- or 40-year time horizon (the horizon most of us are dealing with in our IRA’s and 401(k)s), inflation is the much higher risk. Inflation is the norm. If you’re holding a bond that pays 3% per annum, you’re basically accepting that if inflation returns to a more normal state, you will accept a 0% or lower real return. I’d rather accept a slightly lower real return now, and take the chance that the economy will return to a more normal state in the next 20 years!

TIPS allow you to avoid that problem of regular bonds. If inflation continues on a historically average track, you are protected. On the other hand, however, there are concerns from some that Treasury backed securities aren’t going to be very safe down the road. These folks generally think that the U.S. government is going to succumb to increasing loads of debt. There is a chance of this happening; all investment carries risk, including these “safe” investments.

Additionally, if deflation turns out to be the long-term problem, TIPS are basically worthless. It all depends on what you think will happen in the long term. However, including TIPS in your retirement portfolio can be a good way to protect some of your nest egg from dips in the stock market and the eroding effects of inflation.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.