Inflation or deflation?
Even the experts can’t agree whether rising or falling prices lie in our future.
That leaves investors in quandary: how to construct a portfolio at a time of great uncertainty. A wrong bet could be devastating. If your portfolio is built for deflation, for example, your assets will slump if the country instead experiences a bout of inflation
The answer is to prepare for the economic scenario you think is most likely, and then build in some insurance in case you are wrong.
“If you want to win the war,” says Rich Rosso, a financial consultant at Charles Schwab, “you have to own both sides of the fight to some degree.”
Such an approach necessarily means some investments will suffer no matter how the economy turns. That is OK: Buying insurance doesn’t mean you actually want to use it.
Here are three portfolios, each with built-in insurance. The first will do best in an inflationary period but won’t be crushed if deflation instead rules the day. The second is for investors who fear deflation, but want some protection against potential inflation — even if it is down the road. And the third is aimed at investors who believe the economy will muddle through without severe inflation or deflation.
Inflation
If you believe all the government spending in response to the financial crisis will ultimately beget inflation, you want a portfolio that thrives in a period of surging prices.
Commodities are the primary play, because everything from oil and corn to copper and pork bellies should gain. Plus, commodities — particularly gold — hedge against the dollar, offering a 2-for-1 benefit if a weak dollar accompanies inflation, as some expect.
Tim Foley
Since commodities contracts can be a hassle for inidual investors, consider a fund such as Pimco’s CommodityRealReturn Strategy Fund, which offers exposure to a broad swath of industrial and agricultural commodities.
Though it seems counterintuitive, cash can do pretty well, too. The Federal Reserve would likely fight rising inflation by pushing up short-term interest rates, allowing investors with cash to capture the escalating rates through short-term certificates of deposit and money-market accounts.
Michele Gambera, chief economist at Ibbotson Associates, says his research shows that in the last five bouts of meaningful inflation, returns on cash essentially matched the inflation rate, meaning it isn’t losing its purchasing …
Read the original article at WSJ
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