High inflation can wreak havoc not only on household budgets but on investment portfolios as well, hitting certain assets and generally making it more difficult for returns to outpace rising prices. That doesn't mean investors can't make moves to protect their wealth from high inflation.
1. I Bonds
Series I savings bonds, or I bonds, "are a straightforward way to obtain inflation protection," Christine Benz, Morningstar's director of personal finance, noted in a recent email. "The big negative is that purchase constraints limit their utility for larger investors."
I bonds earn interest through a combination of fixed and inflation rates. The initial interest rate on new I bonds is 9.62% through October 2022, with the rate applied to the six months following the purchase date.
Investors may purchase I bonds electronically through the government's TreasuryDirect website, but they're limited to $10,000 a year when buying them that way, $5,000 if buyers use their federal income tax refund to purchase the bonds in paper form, or $15,000 if they combine the two methods.
Another detail that may give some investors pause, according to a Morningstar column, is that I bonds pay interest only when sold rather than on a regular basis, and owners must hold the bonds for at least a year before selling.
I bonds earn interest until they reach maturity at 30 years or the owner sells them. They are not held in mutual funds.
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2. TIPS
Treasury inflation-protected securities also protect against inflation, with the principal increasing or decreasing based on inflation or deflation. TIPS investors receive interest — a fixed rate tied to inflation — twice a year and the higher of the adjusted or original principal at maturity.
"A cousin of I bonds, TIPS are a way for larger investors to obtain additional tax breaks," Benz told ThinkAdvisor. "On the negative side, core TIPS funds are extremely interest-rate sensitive, and we're often seeing interest rates jump up at the same time inflation is running high. That's why I like short-term TIPS funds like VTIP," she said, referring to the Vanguard Short-Term Inflation-Protected Securities ETF.
"TIPS are also tax-inefficient; they should be housed inside investors' tax-sheltered accounts," she added.
Blanchett said that while TIPS are a relatively safe investment, most people buy them through pooled instruments like mutual funds, which is where the interest rate risk comes into play; rising interest rates could translate into a loss in the bonds' value. This risk doesn't apply to actual TIPS held to maturity, he noted.
TIPS come in 5-, 10- and 30-year maturities, and investors buying them through TreasuryDirect must hold them at least 45 days. Interest income and principal growth are subject to federal income taxes but exempt from state and local income taxes.
TIPS typically generate low yields that give them a higher inflation risk than bonds with similar maturities, according to last week's Morningstar column, In addition to VTIP, Morningstar also cited the Vanguard Short-Term Inflation-Protected Securities Index (VTAPX) and Schwab U.S. TIPS ETF (SCHP) among the top TIPS funds to position against inflation.
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3. Other Fixed Income
Wells Fargo noted that millions of Social Security beneficiaries received a 5.9% annual cost-of-living increase in 2022, the largest in 40 years but not enough to keep pace with this year's inflation. Rising inflation is eroding spending power, especially for those on fixed incomes, the firm said.
Investors looking to supplement their Social Security checks might consider adjusting their portfolios with municipal bonds, U.S. Short Term Taxable Fixed Income and U.S. Intermediate Term Taxable Fixed Income, Michael Taylor, Wells Fargo investment strategy analyst, suggests in a note.
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