Inflation is a threat to every long-term investor, but with the right
investments, you can protect yourself from the loss of purchasing power
that inflation can cause. TIPS, or Treasury Inflation-Protected
Securities, are a valuable weapon in your inflation-fighting arsenal.
TIPS are bonds, but they have a key characteristic that most bonds
lack: Their value is tied to rises and falls in consumer prices. Later
in this article, you'll learn more about TIPS and how to buy them, but
first, let's examine just how detrimental inflation can be if you don't
fight it.
Why inflation matters
For several years,
inflation rates have been fairly subdued, so many people don't remember
just what inflation can do to your wealth. During the late 1970s and
early 1980s, however, everyone got a firsthand introduction to the
ravages of inflation. The oil shocks of the 1970s not only pushed
gasoline prices sharply higher but also contributed to higher costs that
brought on rising prices throughout the economy. With prices rising at a
more than 10% annual clip from 1979 to 1981, it took less than a decade
for prices to double, cutting the true value of every dollar you owned
in half. (more)
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