In case you haven't heard,
is on its way. Unprecedented levels of government debt and deficits
will likely weaken the value of the dollar at some point, thus
raising the prices of everything it buys.
But, the Federal Reserve says there's no significant inflation yet.
In fact, it recently said there might be too little inflation and
will likely keep interest rates low for the foreseeable future,
further increasing the money supply. Meanwhile,commodity prices are
going through the roof.
The price of copper has more than tripled since the end of 2008,
oil is near $90 a barrel (also near the high since the financial
crisis) and prices of several food commodities like corn and wheat
are near all time highs. These materials are in turn used to make
many consumer goods. It's only a matter of time before higher input
prices come out the other end in the form of higher prices for
In fact, inflation has started to appear already.
Although the U.S. inflation rate is still relatively low, ominous
signs have begun to appear. For example, the 10-year Treasury rate
has risen to about 3.48%, a significant hike from 2.48% just five
months ago. Longer term rates reflect, in part, expectations of
inflation in the future and go up as the outlook for inflation
Additional signs of inflation are appearing overseas. The inflation
rate in the United Kingdom rose to 3.7% in December 2010, the
highest level in eight months and well above a target of 2%.
Emerging market economies such as China are seeing even more
inflation. The country has been raising interest rates to fight
inflation, which soared to 4.6% in 2010 and rose to 5.3% in
January. Brazil has forecast an inflation rate of nearly 6% for
2011 as well, up from 5.9% in 2010, which was the highest since
These are storm clouds that portend inflation. Now is the time to
protect your portfolio before it actually arrives -- and while
prices are still relatively cheap.
Investments to own for inflation
A great way tohedge against inflation is by investing in hard
assets that tend to maintain value in times of rising prices.
Commodities such as minerals, grains, metals, sugar, cotton,
livestock and oil typically rise in price along with inflation. In
fact, when the
consumer price index
) increased from 3% in May of 1972 to 11% in December of 1974, the
S&P Goldman Sachs
Index rose 222%, a 55% average annual gain.
There are a number of exchange-traded funds (ETFs) that invest in
specific commodities, as well as those that invest in many
different commodities. I suggested in a
three commodity-oriented stock investments that should not only
thrive in times of inflation, but also have solid growth prospects
even without it. [
Read the article for more...
2.Treasury Inflation-Protected Securities (
TIPS are bonds issued by the U.S. Treasury that are indexed to
inflation, as measured by the Consumer Price Index. Here's how it
Assume a $1,000par value bond was purchased with a 3%yield . A
would initially pay $30 a year ($1,000 X 3%). If inflation was 5%
the first year, theface value of the TIPS would adjust upward by
5%, to $1,050, and the 3%
would increase to $31.50 because it would be based on the higher
($1,050 X 3% = $31.50).
Although these bonds typically pay less interest initially than
traditional bonds, the
value of the bonds will keep pace with inflation, and income from
the securities will rise as well. These bonds are well-suited for
investors seeking to maintain principal and purchasing power in the
face of inflation. But they will not provide a high level of
One of the easiest ways to gain exposure to TIPS is with the
iShares Barclays Capital U.S. Treasury Inflation Protected
. In addition to providing daily liquidity, this
has a lowexpense ratio of 0.20% per year, pays monthly
distributions and currently yields about 2.5%.
3. Adjustable Rate Funds
As the name suggests, these funds invest in bonds that have rates
or yields that adjust periodically. These funds are a great way to
keep pace with rising interest rates, and the share price tends to
remain relatively stable.
There are two major types of adjustable rate bond funds: bank loan
funds and adjustable-rate mortgages. Bank loan funds invest in
senior-secured debt of lower credit-rated companies, while
adjustable-ratemortgage funds invest in
bonds, typically guaranteed by the federal government or its
Bank loans held by funds are often loans to companies with less
than investment-grade ratings. However, the loans are very
short-term, giving lenders the opportunity to frequently raise the
interest rate. This ability to keep pace with interest rate changes
also helps keep your principal more stable than the typical bond
Fidelity Floating Rate High Income (Nasdaq:
is an excellent no-load bank loan fund that currently yields about
3.5%. The fund was one of the best performers in the category
during a tumultuous 2008.
Action to Take -->
If you wait until inflation arrives, it might be too late to invest
in these securities at reasonable prices. It makes sense to invest
now with at least a portion of your portfolio and be prepared.
-- Tom Hutchinson
P.S. -- We've just identified six surprising events that could
break your portfolio wide open in 2011. Knowing these pivot points
in advance lets you focus your investing strategy like a beam of
light in the dark... and make a lot of money in a hurry. Get them
free by simply watching this video presentation.
Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.