Tips on Making an Inflation Proof Portfolio
(NUI) – Inflation is like kryptonite to your savings Superman. It saps the buying power of money you’re stashing away to pay for retirement or your daughter’s college tuition. In fact, in just the last 25 years, Americans have seen the purchasing power of their dollar tumble to little more than 40 cents.
Of course, all the talk today is that inflation is dead. And it’s true that the government’s measure of consumer price inflation increased at the slowest pace in more than 30 years in late 2003. But this pace is only true if you exclude rising food and energy costs.
What’s more, record-low interest rates, the sagging dollar, and massive U.S. trade and budget deficits have put inflation back on the radar for stock and bond investors.
Fortunately, one relatively new type of investment is designed specifically to beat inflation over time. Inflation-adjusted bonds pay interest just like other bonds but with a twist. Their principal value is adjusted for changes in inflation.
This adjustment means that as inflation increases, the value of the bond does as well. Decreasing prices would count against the bond’s principal value; however, these bonds will not be worth less than face value at maturity.
Different types of inflation-adjusted bonds are issued by the U.S. Treasury, government agencies and large corporations. The government has also made inflation-protected bonds available to individual investors in the form of Series I Savings Bonds.
One of the easiest ways for individual investors to tap the power of inflation-protected investments is a mutual fund like the American Century Inflation-Adjusted Bond Fund. This type of bond offers all the benefits of inflation-protected bonds and professional investment management. An inflation-adjusted bond can be an excellent alternative if you’re looking to set aside a portion of your portfolio in an investment specifically designed to target a rate of return above inflation.
Some important distinctions must be made between this type of fund and individual inflation-adjusted bonds. If you hold the bonds themselves, you won’t get your inflation-adjusted principal until the bond matures. In addition, you’re required to pay a “phantom tax” on the principal adjustment each year, even though you don’t get the money until the security matures.
Inflation-protected funds avoid this problem by distributing the principal adjustments as a dividend so you’re taxed on the inflation adjustments your investment makes over time. But it’s important to remember that because those principal adjustments are paid out as dividends, you have to reinvest your fund dividends to realize the inflation protection the fund is designed to provide. If you spend the dividend, you don’t get the inflation protection.
To learn more about the American Century Inflation-Adjusted Bond Fund or to request a prospectus that includes more information about charges and expenses, please call 1-800-345-2021. The prospectus should be read carefully before investing or sending money. As with any other funds, it is possible to lose money by investing in these funds. Past performance is not a guarantee of future results.
Casey Colton is a senior portfolio manager with American Century Investments.