Q: Inflation has been quite low the last several years and many people do not recall the 10%+ inflation during the Nixon/Ford/Carter administrations. If I believe inflation were to rise significantly and be persistent in the future, then where should I invest my cash? CD's, bonds, certain classes of equities, natural resources & commodities, real estate or other types of investment vehicles? Thanks
Mike - El Dorado Hills, CA
A: This is a great question, Mike. Inflation is the hidden evil behind eroded returns, diminished spending power and frustration by those on fixed incomes. As we observe the declining value of the dollar, low interest rate monetary policy and ridiculous government spending - there is no doubt inflation is coming. The question is when. The unfortunate truth is there are few strategies to avoid inflation all together. An investor, however, can reduce the impact of inflation and hedge inflationary risks to his/her portfolio.
Here are a few ideas:
Real estate securities -The properties in a real estate security can hedge high inflation through the increase of rental prices. Longterm leases in sectors like office and retail may have the ability to increase rents with changes in the Consumer Price Index (CPI). Properties with short term leases, like hotels and apartments, can boost rents as leases expire. Real Estate Investment Trusts (REITS) are a great way to gain exposure to this market.
Commodities - The prices of commodities, such as oil, metals and other natural resources, tend to rise much faster during inflationary times. An increase in demand for a finite amount of commodities during inflationary periods further accelerates prices. There are many securities that allow retail investors easier ways to invest in commodities without buying the actual commodities. Commodity stocks may also provide protection. Asking your broker would be a good start.
Treasury Inflation-Protected Securities (TIPS) - These securities are issued by the U.S. Treasury where the principal of a TIPS increases with inflation and decreases with deflation. The correlating measurement is the CPI. TIPS pay interest twice annually, at a fixed rate and are can be purchased directly from the Treasury.
Just remember inflation is a cycle and having a balanced portfolio takes precedent over tactical changes, Mike.