1. Jay Shanken is the Goizueta Chair in Finance at Emory University and a two-time winner of the Roger F. Murray prize from the Institute for Quantitative Research in Finance.

2. S.P. Kothari is a Gordon Y. Billard Professor of Man- agement at Massachusetts Institute of Technology and expert in international economic policy.

Step 2:    Protect Against Inflation

Inflation is one of the greatest risks facing investors. Not only does inflation cost investors more for items they purchase like gasoline and food, but inflation also has a negative effect on stock portfolios. Inflation brings higher costs to companies as well, causing profits to shrink and ultimately the decline of stock prices.

Jay Shanken1 of Emory University and S.P. Kothari2 of Massachusetts Institute of Technology in a study published in 2004 titled Asset Allocation with Inflation-Protected Bonds, conclude a “substantial weight” should be given to inflation-protected bonds in a diversified portfolio. Inflation-protected bonds are indexed to inflation. In other words, they are designed to keep pace with rising prices and protect investment portfolios.

PERCENT CHANGE IN CONSUMER PRICE INDEX

Data Source: U.S. Bureau of Labor Statistics. Annual Data from 1926-2008