by Silicon Valley Blogger on 2007-09-18 30

Im following up on the article I wrote yesterday that covered some facts on inflation. Id like to preface this post by saying that were in a good place right now: inflation is not a threat to us today with it being under control. But it remains noticeable to us in some respects, such as when we note that gasoline and energy prices readjust upward, or when commute costs steadily climb. So its just natural for us to want to keep up or outpace these changes.

Inflation is tame today, but its effects sneak up on you after a long period of time (like grey hair and extra pounds). With the purchasing power of the dollar eroding gradually with time, we count on our work incomes to make up for this. But what happens when we retire from stable jobs sometime in the distant future?

Inflation is also viewed as a hidden risk pressure that provides an incentive for those with savings to invest them, rather than have the purchasing power of those savings erode through inflation.

Two General Strategies To Beat Inflation

Insure Yourself From Inflation For The Long Term

Keep a core portfolio of stocks and bonds, and if youre a bit more adventurous, you can reserve a small amount of your portfolio to inflationary hedges such as precious metals, commodities and real estate.

#6 Consider using inflation-indexed securities in your portfolio.

You want insurance from inflation? Then try TIPs and I-Bonds, which are types of bonds that offer inflation protection. Some good points about these investments: even in the case of a deflationary environment, you still receive the face value of the bond while interest rates keep at zero or higher; these bonds do not correlate with typical asset classes like stocks and bonds, so they offer diversification; and they pay out more when inflation rises. For details on TIPs and I-Bonds, check these great resources: Morningstar. Andrew Tobias, MSN Money, Motley Fool and Wisebread.

Heres a helpful table that compares TIPs and I-Bonds.

You can buy TIPs from the Treasury Department at TreasuryDirect.gov, Vanguard (VIPSX), Pimco and TIAA-CREF Inflation-Linked Bond (TCILX). While you can purchase I-Bonds at the Treasury Department as well.

Counteract Inflationary Pressures With Additional Moves

Once inflation creeps up, it could spell bad news for stocks and bonds. So here are a few, more anticipatory (or even reactionary) strategies to counteract inflations effect on your portfolio.

#1 Keep money in short term funds.

#2 Watch interest and yield rates and lock them in when youre comfortable.

#3 Invest in commodities.