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Tipping Point

As inflation threatens the economy, entrepreneurs look to protect their investments.

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This story appears in the February 2008 issue of Entrepreneur. Subscribe »

Rising gas and food prices aside, John Gaines says he's getting bitten by the inflation bug as a consumer and a business owner. As president and co-owner of Subminiature Instruments, a million-dollar manufacturing company in Ogden, Utah, Gaines says he pays almost twice as much for steel, electrical wire and copper as he did a year and a half ago. "We saw a spike in many of our products," says Gaines, 31, who believes inflation may become a bigger economic threat and drag on his family's investment portfolio--63 percent stocks and 37 percent bonds. "[Prices] have been pretty flat over the past seven years, so I expect [inflation will] hit sometime." He says his risk tolerance has dropped considerably over the past few years since getting married and having a baby.

As a hedge, Gaines recently added Treasury Inflation-Protected Securities, or TIPS, to his and his wife's retirement accounts. A relatively new bond instrument, the overall underlying principal, or par value, on TIPS follows the rate of inflation as tracked by the Consumer Price Index for All Urban Consumers and is adjusted daily. Meanwhile, the coupon is constant, stems from the inflated principal and is paid at maturity. Gaines' financial advisor, Paul Winter of Five Seasons Financial Planning, says many investors are still unfamiliar with TIPS--partly because they've only been around for about 10 years in the U.S., and also because investors typically underestimate the risk of inflation.

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