Column: Five ways to keep the inflationary Scrooge at bay | Business

Yet, I’m often asked what my greatest concerns are for the investment markets, and indeed the economy, as I look out at the next couple of decades. There are several things that give me pause, but if I had to choose one troublesome item that could cause a pervasive, negative impact on savers and retirees, it’s inflation.

It’s been a long time since we lived through a true inflationary period in our country, 40 years, in fact.

Inflation is a measure of the changing price levels of the goods and services that a typical person may consume. The problem with inflation is that it erodes the purchasing power of the money you have now, as the things you need to spend it on down the road get more expensive between now and then.

Why bring up inflation? The short answer is that with every day, the possibility of high inflation gets more and more likely due to an explosion in the monetary supply—the chosen tool of the Federal Reserve and Treasury to combat the economic effects of the pandemic.

But all is not lost just yet. There are a few investment ideas that have proven to be good hedges against inflation historically. Below are some that pass muster.

Hedge 1: Treasury Inflation Protected Securities (TIPS)TIPS are bonds issued by the Treasury Department that are unique in that they provide income that rises with inflation. Unlike a typical bond, a TIP pays interest and returns your principal after it has been adjusted for the change in the Consumer Price Index—the more inflation, the better the TIP return.

TIPs can be bought individually (and in funds) at virtually every brokerage firm.

Hedge 2: CommoditiesCommodities are the building blocks of the economy and include Energy, Industrial Metals, Precious Metals, Livestock, Grains, and Softs. Commodities move in near lockstep with inflation since they are the underlying components of the things were buying. Commodities can be bought as future contracts or within some investment funds at brokerages.

Hedge 3: GoldGold is technically a commodity, as mentioned above. And yet it has its own behavior and reputation as an inflation hedge. Unfortunately, gold is not the hedge people think. It can rise and fall with inflation, but it can trade independently, mostly around changes in interest rates. When inflation rears its ugly head, the Federal Reserve will typically jack up interest rates to cool down the economy and in doing so, gold will often trade lower, since gold does not have a yield component that keep it attractive as rates rise. You can buy gold as a fund and I don’t recommend holding physical gold.

Hedge 4: Stocks (especially natural resource companies and non-interest-rate sensitive industries)Stocks have historically done reasonably well under the pressure of inflation, mostly because inflation is often a sign of an overheating economy. Strong economies are good for stocks. But within publicly traded stock markets, the best hedges are natural resource companies that produce the commodities mentioned above. Additionally, and like gold, interest-rate-sensitive stocks can move inversely with inflation. Thus, it’s best to stay away from rate-sensitive stocks (financials, utilities, etc.) during inflationary spates.

Hedge 5: Real EstateOver various periods of time, real estate has provided a buffer against rising inflation. But this is more so true for properties held directly and privately, and not via funds (like REITs). Real Estate benefits in two ways during high inflation. First, as the Fed is raising rates, landlords often move similarly as interest rates tend to move in tandem. Secondly, the prices of properties (like most hard assets during inflation) move higher as well — it’s their own inflation.

I’ve given you some hedges to consider adding to your portfolio. But to get the true effect, you have to allocate a pretty substantial amount to these ideas, singularly or in aggregate. Allocating 10% to gold and thinking you’re hedged is erroneous. You have to have at least half of your portfolio targeting some form of inflation release if you really want to stave off the inflation of the Scrooge down the road.