The best way to understand why you should prepare for inflation is to have a good grasp about what inflation exactly is. Inflation is a general and progressive increase in average prices over time; there is a saying that goes, “With inflation, everything becomes more valuable—except your money”.

Inflationary cycles come and go, sometimes lasting decades; being ready for the next cycle is always in an investor’s best interest. Individuals should prepare for inflation because it is inevitable in today’s economy, and if one is not prepared, difficult economic times will become even more complicated.

Just Be Flexible

There are ways to prepare for and adapt to the effects of inflation. The best approach is to remain flexible. Individuals that lock themselves into long-term—between 10 and 15 years—low-yield fixed income securities like CDs, bonds, and annuities really are hurt the worst.

Now, keep in mind that fixed income securities are an essential part of any well-balanced portfolio, but the length of time is key here. Generally, the shorter the amount of time you tie your money up in these types of investments the better off you will be in regards to inflation.

The other upside to keeping that period shorter is that when they mature, you can take your money back and reinvest the proceeds in another investment with a higher interest rate if the inflation situation is unstable.

To understand better this type of situation, think about this. An investor puts $1,000 in a two-year bond today that pays out 5% interest. In two years time, the inflation rate rises and that interest rate rises to 7% for new two-year bonds. In order to beat inflation at its own game, the investor will wait until the bond matures, take it out, and reinvest it into a new two-year bond at 7%. If an investor has his or her money spread out in a handful of such investments with different maturity dates, there are several chances for him or her to increase profits.

Let us say that another investor puts $1,000 in a ten-year bond today that pays out 7% interest. In two years, the inflation rate rises, causing the new bond interest rate to rise as well; in two more years, it is up to 9%, in two more it may be 10%. At the end of the ten years, when that ten-year bond is ready to mature, the investor has actually lost money because he or she was unable to “re-up” as the rates rose. With this money tied up for all that time, there is no freedom to adapt to the changes in the market.

This strategy is a basic but very effective one. Investors who utilize it do not have to pay attention to interest rates or inflation closely, nor do they need to time these events; it allows investors to react and adapt quickly to changing market conditions because they are able to reinvest their proceeds frequently.

Keep the Future in Mind

Another effective approach for preparing for inflation is to keep the long-term outlook in mind; keep your investing eye on the horizon and try not to be distracted from the short-term distractions that lay at your feet. In times when governments are flooding the marketplace with money that has no real backing, inflation is not far behind; this temporary diversion causes many investors to lose sight of their long-term goals.

In order to keep the eye on the horizon, consider investing some of your capital in a precious metal such as gold coins or silver jewelry. Such investments retain their value because governments cannot print more precious metals, and they hold “actual” value versus “false” value.

The downside to investing in precious metals is that it is becoming more and more popular, and as such, there are some unscrupulous gold and silver dealers on the markets. The other negative is that precious metals are generally cumbersome to carry, should the need arise, and can prove difficult to store and protect effectively.

When considering utilizing a precious metal investment as a hedge against inflation, check out the dealer you are considering working with; look for references, insurance, and general reputation. Discuss the company’s privacy policies and delivery methods. If anything seems dubious or evasive about the company or its employees, choose another establishment; there are plenty to choose from.

As for storage, check with your bank about safe deposit boxes kept on their premises, or look into obtaining your own safe for your home. Keep in mind that purchasing your own safe can be expensive, and if you choose to keep your investment on your property make sure to check with your home insurance company to see about additional rider requirements in case of theft.

Other Options

There are other odds-and-ends strategies, including Canadian oil and gas trusts, which are operating trusts that trade at prices far below the value of their proven reserves, offer investors monthly dividends, and provide annual yields in the double digits; these investments offer opportunities for both the conservative and enterprising depositor. Oil and gas investments are always a good hedge against inflation, as when inflation stabilizes, demands for energy always increase.

Another option is variable rate bonds based on Libor rates or US Treasuries. It is important when investigating these bonds to look closely at their spread over the index, typically 20 points or so, the bond’s reset frequency and it’s floor interest rate, and be aware of unlikely-calls such as discount bonds. Floating rate notes are another bond choice. Banks issue many of these bonds, so there are many available, and are easily searchable for any broker. Their main draw in the current economic environment is that they sell at large discounts from their par value.

The downside to this particular investment is that the CPI adjustment, which does not fall below zero, figures on the par value instead of the market price and pays out to holders in cash each month. As long as the bank does not default, the depositor walks away the victor; if it does…well…that’s all folks.

Immense government spending and the printing of large amounts of paper money guarantee to stimulate a high inflationary cycle. This is because the more money that is on the market, the less it is worth. Investors can prepare for such events, as they are part of the economic cycle and a capitalist market.

There are a few “rules” to remember: do not be surprised when prices rise; remember to remain flexible with your investments and leave yourself the option to “re-up” your long-term investments; consider “actual” investments such as precious metals, and be aware of what your money is doing. With these tips, you can be a smart investor and survive any inflationary cycle.

To learn more about different types of ways to prepare against inflation, read more about gold coins, gold bullion, cheap gold and about the different ways to invest in gold.

This is Just the Beginning

This is just the start. Wish you knew more about investing in gold? You can, for free. Give me 10 minutes of your time every week, and I'll make sure you know everything about gold investments.

Just enter your email below and I'll personally send you our weekly update. Don't worry -- I hate spam too, and I'll just send the weekly update and that's it.

Tags: gold coins, gold hedge, inflation hedge, invest in gold, prepare for inflation
.