(Sam Swenson, CFA, CPA)
The continued rise in prices across the global economy has left the average consumer in shock and the average investor uneasy. There are a few tools that investors can use to fight inflationso as long as you can take advantage of it, it’s probably a good idea to do so.
1. Examine the I-bonds
Inflation adjusted savings bonds, or “I-bonds”, have been largely irrelevant over the past decade, but are a useful tool in the fight against inflation. Indeed, I-bonds pay an interest rate with two components: a fixed interest rate and an adjustable inflation rate. Throughout the 2010s, interest rates and inflation rates had been abnormally low, so there was little reason for an ordinary investor to buy I-bonds.
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With inflation now at levels not seen in 40 years – with the last reading at 8.6% – I-bonds can now find a role in most portfolios. I-bonds currently pay 9.62%, although this rate is subject to change at least once a year. You’ll also lose the last three months of interest if you redeem the bond before five years, and you can only buy $10,000 a year. Still, guaranteed interest above the current inflation rate is something worth considering in this economic environment.
2. Don’t rush to pay your fixed rate mortgage
One of the few winning cohorts in times of inflation is that of fixed rate mortgage holders. Most people who own real estate – especially those who have bought it in the past decade – have struck a valuable deal with a low, fixed rate mortgage; that is, they borrowed money at a much lower rate than is available today. As such, they pay “yesterday’s money” back and don’t have to deal with growing monthly payments the way tenants do.
Fixed rate mortgage initiators are the ones who suffer in times of rising prices, as they are unable to raise the interest rates of those who have already taken out fixed rate loans. You have much better things to do by continuing to invest in the stock Exchange and other earning assets before prepaying a low fixed rate mortgage.
3. Keep investing for your retirement
Stocks – in general – have historically performed well in times of inflation, so now is probably not the time to stop investing. Even though we have already touched bear market territory this year, it can be seen as an opportunity rather than a calamity for the market. long term investor. Cutting your pension contributions for any period is likely to reduce your net worth decades from now.
Additionally, while ample amounts of cash can provide psychological comfort in bear markets, runaway inflation can quickly erode your long-term purchasing power if you only earn 1% of your savings. Once you’ve established a strong emergency fund, you should consider maximizing contributions to your applicable retirement and education savings accounts to combat rapidly rising prices.
Use available tools and fight back
For almost every economic environment, there is a way to combat apparent headwinds. Inflation is undoubtedly a major challenge for almost all investors. It is therefore all the more imperative to be clear about the levers at our disposal to at least keep pace over the long term.
Watching the I-bonds, making the most of fixed-rate mortgages, and continuing to invest in stocks are things you can do to make inflation feel less intense over time. Unfortunately, the effects of inflation will be felt in the short term, but keeping an eye on the years and decades ahead can provide perspective in what is otherwise an unusually turbulent time.
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