An Inflation Resistant Investment Strategy
How to Preserve Purchasing Power When Inflation Rates Rise
Oct 30, 2009
Economic recessions typically drive down interest rates on fixed income investments and usually keep consumer prices from rising very fast, if at all. As a recession eases and the economy recovers, inflation will return again as companies hire more workers and consumers begin spending more actively. According to International Monetary Fund data, the current inflation rate could rise to 4.7% sometime in 2010 and remain above 4% through 2014.
Investing in Gold
When inflation and uncertainty loom in investors’ minds, they often turn to gold as a hedge. Gold can be a comforting alternative asset, because it is tangible. Gold is physical; it can be seen, touched and admired. As a real asset, there is a level of comfort in owning gold to offset the uncertainty that often accompanies owning stocks and bonds. However, gold is not the only real asset one can own as an inflation hedge.
The term, “real assets,” generally refers to any tangible asset that provides a basic component to manufacturing or industry. Real assets have value on their own, even before they are applied to production. These assets could include other precious metals, real estate, commodities, natural resources, or even collectable cars and works of art.
Real Assets for Inflation Protection
Although investors may choose to own some real assets, such as real estate and artwork, managing and taking physical possession of large quantities of these can be expensive and cumbersome. Fortunately, there are some easy ways to incorporate exposure to real assets in one’s portfolio without taking actual possession. The financial industry has incorporated real assets exposure into many investment vehicles that are already familiar to investors, such as mutual funds, inflation protected bonds, and exchange traded funds.
Investors have literally thousands of investment choices available in the world of mutual funds. In addition to funds that invest in stocks and bonds, some specialty mutual funds invest solely in companies with strong ties to real assets such as real estate, precious metals mining, natural resources, and public utilities. The U.S. Securities and Exchange Commission website is a good source for beginning investors to learn more about mutual fund investing.
Similar to mutual funds, exchange traded funds (ETFs) are another investment option. Although similar in structure to mutual funds, ETFs trade like stocks and may offer more flexible liquidity. As a group, ETFs may be more specialized than their mutual fund cousins, providing investors with easy access to real asset investments such as gold, real estate and commodities.
While they are not real assets in and of themselves, inflation protected bonds can also be an integral part of making an investment portfolio more resilient against the ravages of inflation. Available directly from the U.S. Treasury, inflation protected securities or “TIPS” are designed to increase coupon payments and principal value over the term of the bond by linking these values to the actual inflation rate.
Investment Strategy for High Inflation
As with any reasonable investment strategy, real assets generally should be included as part of a broader portfolio rather than as the entire portfolio themselves. During those times when stocks under perform and fixed income rates lag, real assets often move in the opposite direction and can provide some positive investment returns to offset losses among other assets. Before determining how much of one’s assets to commit to this approach, it is highly advisable to meet with a financial advisor to discuss investment time horizons and individual risk tolerance for making these types of investments.
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