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If you survived the 1970s, you probably have several large occupants in your closet of anxieties—such as disco, shoulder pads, and inflation. While the first two may haunt you for ages, you can get rid of your fear of soaring prices if you choose your inflation hedges wisely.

Inflation is a perfectly rational fear for investors, as rising prices erode the real value of your nest egg. At 3% inflation, $10,000 has the purchasing power of $7,374 after just 10 years. The higher
the rate, the harder your portfolio must work—and the more it must earn—just to stay even.

While inflation since the global financial crisis has been deader than a car battery in a Minnesota winter, it may be coming back to life. The consumer price index (CPI) rose at a 2.7% annual clip in February, up from less than 1% the previous March, according to the Labor Department.

After lifting short-term interest rates in March, Federal Reserve Board chair Janet Yellen hinted that more rate hikes may be on the way to contain rising prices, but it could be a while before the Fed’s medicine takes effect. So it’s up to you to protect your portfolio.

Source: Credit Suisse Global Investment Returns Yearbook 2012

Pay Attention

Conventional wisdom says the yellow metal is a cure for inflation, but gold’s record has been spotty. For example, gold started 1980 at $559.50 an ounce and finished 2000 at $274.45—a 51% loss. The CPI rose 124% during that period. And from 1900 to 2011, the real annual return for gold was just 1% after inflation, vs. 5.4% for stocks.

For Commodities

Look at silver. This precious metal has many industrial uses. And it’s cheap now compared with gold, says David Beahm, CEO of Blanchard Precious Metals. The gold/silver ratio, which measures how many ounces of silver you need to buy an ounce of gold, is “showing silver is likely a better play than gold,” he says. To avoid worrying about storing and insuring your stash, use an exchange-traded fund, such as iShares Silver Trust (SLV), which holds bullion.

For Bonds

Look at TIPS. Treasury Inflation-Protected Securities are a type of Treasury that adds to your principal as the CPI rises. But those additions are taxable, so TIPS are best held in a retirement account. And they’re still bonds, so they’ll get dinged when rates rise. To minimize this risk, go with a short-maturity fund, such as Vanguard Short-Term Inflation-Protected Securities (VTIP) in our Money 50 recommended list.

For Stocks

Look at materials and technology. Probably the best hedge for long-term investors is stocks, says Sam Stovall, chief investment strategist for CFRA. And these two sectors fare best in inflationary times. Why? Inflation implies demand is rising faster than supply, and that means the price of raw materials is climbing. Meanwhile, tech allows businesses to substitute machines for workers, keeping costs down and profits up. In the Money 50, Primecap Odyssey Growth (POGRX) has a big tech weighting, while PowerShares S&P 500 Quality (SPHQ) has a larger-than-average stake in materials.