Investment
Tips for
Hedging
Against
Inflation
Inflation rates have remained
historically low over the past t wo
decades. Recent spikes in the price
of basic commodities such as food
and gasoline, however, remind
investors that price instability is
actually the norm. Learn how you
can make smart trades that help
hedge against inflation.
investors that price instability is
actually the norm. Learn how you
Minimize long-term bond
investments. Long-term bonds
have delivered over the past 45
years, acknowledges Christopher
Geczy, academic director of the
Wealth Management Initiative
for the Wharton School. “But the
party won’t last forever,” he says.
Even though the government
guarantees bonds, inflation can
cause them to lose value over several decades, agrees Dan Greenshields, president of ShareBuilder,
the brokerage arm of ING Direct.
Investors are safer going with infla-tion-indexed bonds, because their
yield adjusts according to inflation
rates. “This will protect you—but
not entirely,” Greenshields adds.
Keep it real with real assets.
Investments in farmland and other
real estate tend to be strong inflation hedges. Geczy suggests investing in timberland, for example,
because manufacturers of paper
or other wood products are able to
boost prices when inflation creeps
up. Similarly, they can halt logging
when demand lags, thus keeping
supply limited and prices steady.
Invest in energy. No matter how much Americans slash
their personal budgets, they will
continue to heat their homes and
switch on the lights each evening.
“Everyone needs electricity,”
Geczy points out. Even if a particular source of energy takes a hit—as
BP did in the wake of the Deepwater
Horizon oil rig explosion—it takes
time for consumers to substitute
across resources, he adds.
Not all that glitters is gold.
Metals such as gold, silver and
aluminum have been high performers historically. But Greenshields raises the caution flag when
it comes to these investments,
because of complicated political
factors that he says are artificially
driving up prices.
Diversify. Investors would be
wise to pay attention to diversified
stock indexes, Greenshields says.
“Inflation can come out of nowhere,
and you need to be prepared.”
Geczy agrees that diversifica-
tion remains an especially endur-
ing principle during inflationary
times. “You don’t want your entire
investment to be subject to the
idiosyncrasies of a single firm, or
even a sector.”
Don’t stash your cash. A $100
bill stu;ed under your mattress
today will be worth exactly $100
50 years from now. Yet the buying
power of that money will be greatly
diminished.
“Cash tracks inflation; it does
not outperform it,” Greenshields
stresses. —Gwen Sha;er
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