Strategies To Protect Your Portfolio Against Inflation

Wed Feb 3, 2010, 5:16 am | 2 Comments

Many experts suggest to not worry about inflation in the near future. But because certain events have recently taken place, there might be a chance of inflation creeping up in your financial life. The reason some experts give is two fold: 1) The rapid growth of the money supply from the U.S. Government into the economy and 2) the fiscal deficit that is floating around way up in the stratosphere because of the recent economic stimulus actions.

In any case, inflation should always be in the back of your mind when you want to invest your hard-earned money. Why, you may ask, should you worry about inflation? Because it tends to erode your purchasing power when it comes to paying for everyday goods and services whether you invest or not. However, for you as investor, the effects can be two fold: 1) Inflation erodes the purchasing power of your portfolio’s assets, and 2) It erodes the value of your stock and bond returns.

Strategies to protect your portfolio against inflation in 2010:

• Inflation-adjusted bonds

  For investors in the fixed-income arena, one way to help insulate a portfolio against potential inflation concerns is through Treasury Inflation-Protected Securities (TIPS).

• Commodities

  Commodities, as you might have guessed, takes a major part in the development of national economy. Historically, investment in commodities have proven to be inflation-buster. Some of the commodities are energy, agricultural goods and metals.

• Equity-fund diversification

  Including precious metal like gold in your diversification strategy is a good way to fight inflation. Another way to diversify is to buy stock in companies that can benefit from rising prices.

In a Nutshell
Whether the threat of inflation is real or not, historically it is a recurring issue in the U.S. economy. So every year or so very often, probably twice a year, make small portfolio adjustments that may help you stay one step ahead of any future inflation concerns. As always, please talk to your financial adviser.

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