Investment Secrets

Beating Inflation

Published Wednesday, January 5, 2011
By Kevin Amolsch

Inflation is simply the devaluation of the dollar or the increase in prices of goods and services.  As we go through life we can see this take place.  I remember when I started driving the price of gas was $.99 a gallon.  The first time I saw that price break a dollar I was shocked, and this was not that long ago.  The bottom line is it takes more money today to buy the stuff we want and need than it did 10 years ago and the prices will continue to rise.  Do you think about inflation as you save for retirement or save for college tuition for your children?

I look at rates banks are paying on CDs and money markets and I get sick to my stomach.  I Goggled money market rates and clicked on a link that said top rates on money market accounts.  The top three rates offered as I write this article are: 2.02%, 2.01%, and 1.75%.   Top three 1-year CDs (which have a much smaller minimum deposit) are: 1.41%, 1.40%, and 1.35%.  Inflation today is 1.1%.  So with the top money market account in the country you are beating inflation by less than 1%.   Can you realistically expect to save and earn any money with an adjusted return of less than a percent?   Keep in mind these are the best rates in the county, there is a good chance the rate on your saving account is actually less  than inflation meaning you are actually LOSING buying power as time goes on.  Can you believe that many Americans are actually losing money by trying to save it?

Here is a chart of inflations rates by month for the last 10 years:

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Ave
2010 2.6% 2.1% 2.3% 2.2% 2.0% 1.1% 1.2% 1.2% 1.1% NA NA NA NA
2009 0.0% 0.2% -0.4% -0.7% -1.3% -1.4% -2.1% -1.5% -1.3% -0.2% 1.8% 2.7% -0.3%
2008 4.3% 4.0% 4.0% 3.9% 4.2% 5.0% 5.6% 5.4% 4.9% 3.7% 1.1% 0.1% 3.9%
2007 2.1% 2.4% 2.8% 2.6% 2.7% 2.7% 2.4% 2.0% 2.8% 3.5% 4.3% 4.1% 2.9%
2006 4.0% 3.6% 3.4% 3.6% 4.2% 4.3% 4.2% 3.8% 2.1% 1.3% 2.0% 2.5% 3.2%
2005 3.0% 3.0% 3.2% 3.5% 2.8% 2.5% 3.2% 3.6% 4.7% 4.4% 3.5% 3.4% 3.4%
2004 1.9% 1.7% 1.7% 2.3% 3.1% 3.3% 3.0% 2.7% 2.5% 3.2% 3.5% 3.3% 2.7%
2003 2.6% 3.0% 3.0% 2.2% 2.1% 2.1% 2.1% 2.2% 2.3% 2.0% 1.8% 1.9% 2.3%
2002 1.1% 1.1% 1.5% 1.6% 1.2% 1.1% 1.5% 1.8% 1.5% 2.0% 2.2% 2.4% 1.6%
2001 3.7% 3.5% 2.9% 3.3% 3.6% 3.3% 2.7% 2.7% 2.7% 2.1% 1.9% 1.6% 2.8%
2000 2.7% 3.2% 3.8% 3.1% 3.2% 3.7% 3.7% 3.4% 3.5% 3.5% 3.5% 3.4% 3.4%

Here are a few tips to beat inflation.

Invest in real assets – in my opinion this is the best hedge to inflation.  Real assets generally increase in value as inflation increases and it is normally at a higher rate.  Some examples of real assets are; gold, silver, and real estate.

Government backed bonds – I am specifically talking about Treasury Inflation Protected Securities (TIPS).  These are bonds that adjusted to keep pace with inflation.  This is probably the safest way to keep pace with inflation but that is about all you will do.  Don’t expect to actually make money with these.

Index funds – these are stocks that are supposed to mirror certain indexes.  For example you can buy an index fund that mirrors the S&P 500 which is a good fund to follow the overall ups and downs of the stock market.  The good thing about these is you don’t need think about them and over time stocks have proven to increase in value.  I say over time because you will experience some downward trends so you need to be able to invest for the long run.

Refinance everything – rates are really low so if you have long term debt you may consider refinancing it to lock in low interest rates.

Paper assets secured by real assets – I have to throw this in there since this is what my company does.  You can invest in promissory notes secured by real estate or other assets that will increase at a higher rate than inflation.  Generally promissory notes pay investors well above inflation.