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Personal Financial Planning Tips : How to Hedge Against Inflation as an Individual


Hi my name is Julie Asti, I’m a Certified
Financial Planner with Asti financial management. And today I’m going to be talking about how
to hedge against inflation as an individual investor. One of the things that you are going
to want to take a look at, if you hold them is going to be your bond portfolio. Bond prices,
excuse me, bond terms are going to be definitely effected by the rate of inflation. For example
if you have a bond that is paying four percent and inflation is running at four percent your
real rate of return is going to be zero. You are not going to be getting ahead at all on
that rate of return on the bond. There’s not a lot of control you can have over the rates
that your bonds are currently paying but one of the things that you can do, is you can
take a look at the duration of your bond portfolio and duration applies to the amount, the length
of time of the bonds. Bonds can range anywhere from short term,less then a year all the way
up to long term, which can be ten to thirty years. So it tends to be that when inflation
is running high, bonds that are longer term maybe more effected then bonds that have a
shorter term duration. The other benefit is bonds that have a shorter term duration they
are only going to be, they are only going to have a set length of time till the bond
portfolio is going to becoming due more often and therefore you can lock in at hopefully
higher interest rates that will be more competitive with the current inflation environment. So
you want to take a look at the duration of your bond portfolio. One easy way to do that
is to invest in bond mutual fund and research the duration on that bond mutual fund and
have a professional money manager managing the duration of the bond portfolio on your
behalf. One of the things you may want to do if you are an individual bond holder is
take a look at tips which are treasury inflation protected securities. They are offered by
the U.S. government and what they do, they offer you a base rate of return that’s adjusted
for the amount of inflation. You get a credit for the consumer inflation that’s going to
be on an annual basis. So you are in a sense going to be guaranteed a real rate of return
that’s going to be modest but you are also going to be guaranteed a credit for the amount
of inflation. So it will keep your bond portfolio of tips above the rate of inflation. And the
third thing you can do when there is a high inflation environment is to look at commodities.
Commodities are things like gold and silver bullion, actually hard you know, metals and
assets. Commodities usually do well in periods of high inflation. For each of these different
types of investments it’s going to take some managing and some monitoring on your part
because as soon as the interest rate and the inflation environment is going to be changing
the value of the investments that you have in the portfolio that are acting as a hedge
may actually turn against you if the market begins to do well and inflation begins to
go down, those assets are not going to be returning as much to you and they may actually
start to decline in value. So if you are looking to use instruments, investment instruments
as a hedge against inflation you have to be mindful and monitor them and make sure to
really manage your portfolio. My name is Julie Asti, I’m with Asti financial management and
you can learn more about my services or my company at www. astifinancial dot com.

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