Whether it’s holiday bloat or the government’s spending over the past several years, now is a good time to consider ways to protect yourself against future bulge. Just like anything else ̧ too much of a good thing over time, i.e., printing and placing new money into circulation, decreases its worth. Simply put, inflation–the devaluation of a currency–is too much money and too few goods.
The government has been printing money in an effort to stimulate our faltering economy and shore up the banking and automotive industries. as a result, money supply in the U.S. is now at historic highs. With unprecedented levels of government stimulus pumped into the global monetary system, the next question is, when will inflation rear its ugly head? Rising inflation can negatively impact investors who are unprepared for its damaging effects: as the value of the dollar decreases, the cost of goods and services increases, making your everyday dollar (and investments) worth less. In fact, significant inflation can threaten your ability to retire or to attain other goals that you intend to achieve with your savings. It’s important to look for investment strategies to protect yourself against the effects of inflation. Here are a few you can do now.
Inflation-Protected Government Bonds
The U.S. and other governments issue bonds that offer protection against inflation because the principal amount of the investment increases with inflation by a proportional amount. This feature helps maintain the value of your investment even in times of inflation. One way you can buy a U.S. portfolio of such bonds (Treasury Inflation Protected Securities or TIPS) is by investing in an exchange-traded fund (ETF) called iShares Barclays TIPS Bond Fund (NYSE: TIP). ETFs are attractive investments because of their low costs, tax efficiency and such stock-like features as trading flexibility. Unlike mutual funds, they can be bought and sold at current market prices at any time during the trading day
Gold can serve as a hedge against declining market value of bonds during an inflationary period. For example, if you own $10,000 worth of bonds, then consider buying $1,000 worth of gold as a hedge against declining bond value. One way to own gold without having to worry about storage of bullion, coins, or other physical items is the SPDR Gold trust (NYSE: GLD), the world’s largest gold-backed ETF. Another way to approach this concern is to own a portfolio of gold mining companies, such as market vectors Gold Miners ETF (NYSE: GDX). As goes gold, so go the gold miners.
Similar to inflation, commodity prices tend to increase as economies grow and move in the same direction as inflation (i.e., correlated investments). Commodities are raw materials used in the production of goods that consumers buy–from food to gasoline to housing. They also include agricultural products, energy products, and metals such as gold, silver, and iron. Over the years, commodity prices have been going higher and higher, primarily because of the industrialization of many emerging countries.
One way to take advantage of rising commodity prices is to invest in commodity-based ETFs, mutual funds, and directly in the stocks of companies whose business is in their production, e.g. mining companies. One broad commodities fund that has been around for a long time and has a good track record is iPath Dow Jones-UBs commodity index total return ETF (NYSE: DJP). (One note of caution, however, is that over time the returns of commodity-based ETSs do not necessarily track the price index of the commodities themselves, due to the costs of renewing underlying futures contracts associated with these funds every month.) if you prefer to invest in a portfolio of companies involved in production of natural resources, then consider iShares S&P North American Natural Resources ETF (NYSE: IGE), which holds the stock of mining, oil, and agricultural companies headquartered in North America.
Betting Against (“Shorting”) The Dollar
Another strategy is shorting the dollar. By doing so, you borrow U.S. dollars now and sell them at today’s (supposedly) higher price, with the intention to “buy” them back later when they are less expensive. In this scenario, your profit is the difference between selling high (now) and buying low (later). This tactic is called “short selling.” such a trade can be complicated to handle individually, but you can buy shares in a fund called Powershares DB U.S. Dollar index Bearish Fund (NYSE: UDN), which shorts the dollar against a basket of developed-world currencies.
If short-selling the almighty dollar sounds too risky (or unpatriotic), you can approach the same issue a bit more conservatively by purchasing a portfolio of foreign currencies and money market notes denominated in foreign currencies. Wisdomtree Dreyfus Emerging currency Fund (NYSE: CEW) holds a variety of foreign-denominated (i.e., emerging-markets currencies) instruments.
Meeting your financial goals tomorrow may depend on investment decisions you make today. While it’s impossible to predict when inflation will increase, we believe that it will eventually find its way into our pocketbooks. By investing in specific asset classes today, you can help shield your portfolio (and wallet) from the damaging effects of inflation tomorrow.
Lynne Wiggins is an Investment Advisor with Austin-based Pecan Street Partners, which offers comprehensive financial advisory services through Brookstone Capital Management, LLC. A former SEC Enforcement Attorney, Lynne more than 20 years experience in the securities markets. She and her partner, Susan, live here in Austin with their 2 children, Maddie and Zac.
Matt Willson writes a monthly investment newsletter that follows a proven mathematical model. He is married to Marilyn Willson, Development Director of AIDS Services of Austin. You can read Matt’s blog at http://blog.pro-folio.net.