investing

How do I safely diversify against inflation?

Don TaylorDear Dr. Don,
I am not diversified, and I'm close to 80. Is money in the bank or a credit union, which is protected by the Federal Deposit Insurance Corp. and private insurance, OK for now? My thoughts are that inflation is on its way, and where else could I diversify to where the principal is not vulnerable?

Thank you.
-- Philip Principal

Dear Philip,
People tend to be more diversified than they think they are because they don't look at the big picture. I expect that you're only considering how your financial securities are invested. We typically categorize these investments as stocks, bonds or cash, with cash being financial shorthand for short-term liquid money market investments. That would include bank savings accounts but not long-term certificates of deposit, which I would classify as bonds.

If you're receiving Social Security, you're getting an income stream that compares to an inflation-indexed fixed-income annuity. Getting a pension? There's another fixed-income annuity. If you own your personal residence, you are invested in real estate.

With all that said, you could still need to diversify your investments. My worry is you're concerned about future inflation, but your focus is on protecting principal. Investors seeking safety of principal in federally insured bank accounts can find it -- but that won't do much to protect those deposits from having their purchasing power decline due to inflation.

The government guarantees that back deposits and shares insured by the FDIC and the National Credit Union Share Insurance Fund, or NCUSIF, will always trump the guarantees offered by a private insurer because the government can do something the insurers can't -- tax the populace. Private deposit insurance is available from many financial institutions to provide coverage beyond FDIC and NCUSIF limits, but there's also the Certificate of Deposit Account Registry Service, or CDARS, which allows you to have multimillion-dollar FDIC insurance coverage with one deposit relationship from a participating bank.

At today's prices, I don't recommend U.S. Treasury inflation-protected securities, or TIPS, as a method of protecting your portfolio against inflation. These securities have been bid up in price to the point where the yields on the shorter maturities are less than the inflation rate, and the longer maturities offer yields of less than 1 percent plus inflation. At some point, the music has to stop, and the price risk in these securities can be substantial, even though the TIPS' inflation-indexed face value is guaranteed by the U.S. government.

Series I savings bonds don't have the price risk inherent in TIPS, but you can only buy $5,000 in face value each year -- unless you buy them with your tax refund money. Still, a current purchase offers you just inflation protection with no fixed yield above the inflation rate.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

advertisement

          Connect with us
advertisement
CD & INVESTING NEWSLETTER

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

CDs and Investment

How should my teen invest $150K?

Dear Dr. Don, My son will turn 18 years old in December. He has $150,000 from a settlement now sitting in the bank. What is the best plan to pursue for investing this money? Is investing in precious metals a good way to... Read more

advertisement

Blog

Dr Don Taylor

Earnings season, investing and you

Should individual investors try to anticipate financial results in an earnings report?  ... Read more

Partner Center
advertisement

Connect with us