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You can buy individual TIPS directly from Uncle Sam through TreasuryDirect or through mutual funds such as Vanguard Inflation-Protected Securities (VIPSX). U.S. I-Bonds are also geared to offer inflation protection, but unlike TIPS, it's their interest rates, not underlying principals, that fluctuate along with prices. Interest from I-Bonds comes from two components, a fixed and a variable interest rate. The fixed rate is set at the time of purchase, while the variable rate is tied to the Consumer Price Index. I-Bonds are available through TreasuryDirect.
I-Bonds have some tax advantages over TIPS for investors in taxable accounts. They're also available in increments as low as $50 (TIPS start at $1,000). To learn more about the differences between TIPS and I-Bonds, check out this article.
Don't rely on commodities or real estate
The conventional wisdom is that gold, other commodities such as oil and copper, and real estate provide shields against inflation because the prices for these assets often surge when inflation does.The conventional wisdom is grounded in fact: Inflation climbed to double digits in the 1970s, and the price of gold and other commodities soared. Real estate, too, rose sharply. While gold and real estate rose, stocks delivered subpar returns.
Based on the experience of the 1970s, investors who are worried about inflation today might be tempted to dump stocks and buy gold, oil and real estate. Yet how well those areas fared in the past may not be a reliable guide to the future, meaning that they are, at best, an imperfect hedge against inflation. These areas have enjoyed huge runs in recent years, too, which could limit their upside in an inflationary environment.
It's also possible that some asset classes typically thought of as inflation hedges -- such as real estate -- really aren't.
Ralph Block, a real-estate investor and the author of "Investing in REITs: Real Estate Investment Trusts," argues that real estate's strong performance in the inflationary 1970s could have been coincidental. Sure, real-estate values rise in inflationary environments, but so do operating costs such as maintenance and insurance, Block notes.
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As noted earlier, inflation also typically leads to increases in interest rates. That reduces the value of real estate by increasing borrowing costs and making other, safer income-oriented investments relatively more attractive. Though real estate holds its value well against inflation, Block argues that it doesn't do so any more effectively than stocks.
The case for real estate -- or commodities, for that matter -- really hinges more on the ability to diversify a portfolio than on inflation-fighting traits. Both real estate and commodities tend to zig when stocks zag, making exposure to them beneficial even if they don't guard against inflation any better over the long haul.
Like stock market returns, economic growth or interest rates, inflation is a variable that you can't control.
Rather than grouse about the prospect of higher inflation, focus on things that you can control. You can control what you own, so diversify your portfolio to include TIPS, for example. You can control how much you pay for your investments, so stick with low-cost funds.
If higher inflation lurks, don't make it even harder for your portfolio to keep up by saddling it with the burden of high expenses. Though inflation isn't something to be desired, it's something you can learn to live with.
This article was reported and written by Christopher Davis for Morningstar.
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