Inflation-Proof Your Portfolio

By Martin Brown

There’s probably never a way to assure that you, like everyone else in an inflationary economy, won’t feel the pain of rising costs. But there are a number of things you can do to help your investments keep pace with inflation—and perhaps even better, profit from the rising cost of goods and services.

Think of inflation as the termites that have invaded your house of savings. Every percentage point that inflation moves up the value of your savings moves down. Like termites the damage can be slow to occur and not happen in dramatic spurts.

But a bad and steady inflationary run can really knock the stuffing out of your future financial plans so paying attention when inflation rears its ugly head is never a bad idea.

First you may ask, what makes this a possible inflationary period? Here are a few telltale signs:

1. The Cost of Fuel

The number one threat at this time is the rise of energy prices. We have an economy that depends on transportation. We ship by truck, not train, which is bad policy number one. And we often sell in New York a head of lettuce grown in California’s central valley, which is bad policy number two.

So when fuel prices go through the roof, they effect everything from running your car to your airline tickets to see the folks for Thanksgiving, right down to the salad you eat for dinner tonight.

2. Higher Costs of Consumer Goods

High energy prices are a sure spark for inflation. Two simple examples, eggs are up 30% and bread has jumped 15% in just the past year.

3. Natural Disasters

Another troubling sign for inflation is the high cost the U.S. government will bear this fall in hurricane-relief projects. That tab is estimated to run over $100 billion. That flood of money running into the manufacturing sector of the economy reduces the supply of goods, pushes up demand and puts additional inflationary pressure on the American economy.

Now that you know what inflation feels like, what are relatively stable investments during inflationary periods?

Believe it or not, there are many. Here are two you may want to consider:

1. Commodities.

Typically, commodity prices rise and keep pace with inflation. Gold and oil have trended downward in the past month but they are likely to move upward as the threat of inflation continues to increase. Other commodities such as grains and metals are likely to rise as well.

2. Stocks of Specific Industries.

Additionally, certain industries are more inflation-resistant than others. Healthcare products that rise typically faster than the rate of inflation, do just as well, if not better, during periods of inflation So do business that supply food and household products. As a general rule, the healthcare industry, as well as food, and household-product manufacturers, along with the makers of basic office needs, paper supplies, and so on, don’t suffer the way industries like real estate do during inflationary times.

As for investment areas to avoid, here are some to consider: Auto and auto parts makers, furniture makers, and housing manufactures, and as just mentioned, real estate companies.

Why? Because high ticket items, cars, furniture, and homes of course, are purchased using credit and when interest rates rise it dampens and on occasion kills the sale of big-ticket items.

Now, how do you take practical advantage of this knowledge? Your best approach is to buy into funds that hold shares in energy, healthcare, pharmaceutical, and food stocks, plus commodities as well.

And finally, remember that in times of inflation, few holdings get punished as badly as that old “sure thing,” US Treasuries.

That’s why if your looking for the peace of mind of treasury notes, now would be a good time to ask your broker about Treasury Inflation-Protected Securities, known simply as TIPS. These are one guaranteed hedge against inflationary pressures. With TIPS the principal value of your bonds are adjusted upward every six months in order to stay even with the consumer price index. TIPS underperform treasuries during non-inflationary periods but are a good move when inflation, like now, starts heating up.

Economies are living breathing entities. They move in and out of various phases. It is unlikely, given the current consumer and economic conditions, that a period of inflation is not in the immediate future. Therefore the time to consider inflation proofing your portfolio is now.

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