Protecting your money from inflation

Janet Bodnar, deputy editor of Kiplinger's Personal Finance magazine


Tess Vigeland: Just how bad is inflation these days? Well, consider this: it costs 1.26 cents to make a penny and almost eight cents to make a nickel.

This week, the House passed a measure that would require the Mint to make both out of cheaper steel instead of zinc, nickel and copper, all of which have seen run-ups in prices on the commodities markets.

Inflation is showing up in other places as well. Oil hit all-time highs this week. Food prices are setting records too.

If you're trying to figure out where to put your money to protect it from all this inflation, good luck.

Janet Bodnar is with us from Kiplinger's magazine. Welcome back to the show.

Janet Bodnar: Oh, it's my pleasure Tess.

Vigeland: So let's deal first of all with a Federal Reserve that has slashed short-term interest rates over and over and over again and of course, that means savings accounts and CDs are paying, what, 2, 3 percent at most if you're lucky and that's really not going to help you overcome today's inflation figures, is it?

Bodnar: Well, those rates in particular won't, but there are still places, online in particular, online banking institutions that will pay higher rates than that that are at least level with the inflation rate, sometimes maybe even a little bit higher. The second thing to remember is that interest rates are low because the Federal Reserve has been cutting interest rates, but if you really do believe that inflation is going to be rising over the next year or two, then those rates are going to come up as well, so as long as you have your money in short-term savings accounts and you're not tying your money up for five years or for the long term, you would benefit from rising rates as those rates naturally go up with the market and also again, as banks themselves may be looking for new money, so they'll be raising their rates to draw money in.

Vigeland: So it sounds like the key there is not to get yourself into a 5 or 10-year CD?

Bodnar: Exactly. You don't really want to do that. So it just goes to show it's kind of a volatile time right now. People don't quite know what's going to be happening.

Vigeland: I wanted to ask you about Treasury Inflation-Protected Securities. These are what are known as TIPS and these are bonds that guarantee that they will keep up with inflation, but there's a problem with that right now, isn't there?

Bodnar: Yeah, there is a problem with that because they're so darn popular that the rates are actually quite low and they're not necessarily keeping you up with inflation. There is an inflation factor built in to the pricing of those and so theoretically at least, when inflation goes up, you're supposed to get an inflation premium. So again, you're kind of betting on how much inflation is going to rise and whether the inflation premium that you're going to get is going to make up the difference.

Vigeland: Two of the classic inflation hedges: real estate and precious metals -- gold, of course, we've been hearing a lot about gold over the last few months, but those aren't really viable options right now are they, because obviously the real estate market, homes are in decline in terms of their value and gold is so high at this point that if you get into it, isn't there a risk that you're not going to go any higher?

Bodnar: Right, you're going to be buying at the top. Yeah, I mean there are lots of potential investments bubbles out there that are kind of based or predicated on the notion that there's going to be increased inflation, so what happens if that doesn't happen? Then a lot of these commodities are really overpriced. One thing that we at Kiplinger's have done, we have a listing of funds -- our 25 favorite mutual funds -- and what we did this year for the first time ever, we actually included a very well diversified commodities fund and so what happens is you're not betting on some commodity that you really don't know anything about and a lot of regular investors just aren't familiar with commodities and I think that's kind of the way to go
worried about inflation and you want to have some of this protection in your portfolio.

Vigeland: OK, well that's certainly one way to go, but where else can you park your money right now. Assuming that you're not comfortable with taking some losses in the stock market, where will you get some sort of inflation protection?

Bodnar: I've got to say the stock market is it Tess. I mean, when you look over the long term, and this is what we're talking about here, the historic yield on the stock market is roughly 10 percent a year, give or take, depending on what period you're looking at, and it is the one single thing that keeps you ahead of inflation. If you're talking about long-term investors who have money in their 401(k)s, money in their retirement accounts, the really important thing is to continue investing in those accounts, because you're looking at a long-term outlook here.

Vigeland: Alright. Janet Bodnar is deputy editor of Kiplinger's Personal Finance magazine. Thanks for your help today.

Bodnar: Oh, my pleasure Tess.


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