5 ways to inflation-proof your portfolio

22nd July 2010


The good news is that, although there are no risk-free options there are a number of investments that if held for five years or more should protect your money from the corrosive effect of inflation.

1. Index linked funds and ETFs

Lorna Bourke's article on Citywire describes the pros and cons of index-linked gilts, but for most people the easiest way to invest in them is via a fund or ETF.

Trustnet lists 15 managed funds in the sector with links to the underlying details. Over the last five years they have produced an average return of 30.5% 

2. TIPs

America has its own version of index-linked bonds called Treasury Inflation Protected Securities or TIPs.

The General Board of Pension and Health Benefits of the United Methodist Church provides a clear explanation of how they work. 

TIPs are linked to US inflation so they are not a perfect fit for UK based investors.

There is also the currency angle to consider, as if the dollar weakens against the pound it will reduce the returns, although the converse would have the opposite effect.

3. Equity funds and ETFs

For longer term investors the most traditional way to protect against inflation is to invest in shares.

The idea is that the companies should be able to grow their profits in line with inflation and provide an increasing income stream in the form of higher dividends.

We have seen that share prices can fluctuate dramatically so the safest option is to diversify by spreading your money across a portfolio of equity funds and ETFs.

Hargreaves Lansdown has put together a list of their favourite 150 funds which makes a good hunting ground. 

David Chellew, global head of market position at HSBC Global Asset Management, says that shares are one way to beat inflation since the growth in company profits should outstrip the rise in prices because of the risk premium that shareholders enjoy.

"It follows that where corporate earnings are going to grow most strongly in the world is the best inflation proofing you can get, which is the emerging markets.

"Therefore an emerging market ETF is a good way to hedge against inflation."  

4. Gold

Gold has traditionally been seen as a safe haven and a store of value that will rise along with inflation.

It is currently trading close to its all-time high so you might want to take a look at  Going for gold – are you too late? before deciding whether to invest.

The Yorkshire Post explains all the different options. 

5. Other commodities

Assets like commodities are generally thought of as an inflation hedge as they are expected to hold their real value when prices increase.

Some interesting research from Seeking Alpha suggests that some commodities are better at this than others.

For most investors the easiest way to gain exposure is by buying a diversified commodity fund or ETF.

These either invest in the underlying resources or the mining companies involved in their extraction.

They are classified in the specialist sector so you have to look through the list provided by Trustnet to find them.

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