Mark this down. Be confident, Be prepared. Inflation is coming. The talking heads at the Federal Reserve and media commentators tell us that inflation is being tamed and we don’t need to be concerned. That is true if your outlook is limited to a very short period. There is no way that the current flood of dollars infused into the economy will not result in inflationary pressure. Only about ½ of the total Stimulus dollars have been spent. In the coming year and a half, the rest will be released. So, the full inflationary impact will take a while, but the result is inevitable. 

Even if you doubt that inflation will occur with severity, you should allocate a portion of your holdings to inflation protected assets. The most hard hit by inflation will be those that locked in rates of return at today’s rates. This includes buying treasuries at 3.2% for ten years. That is higher than today’s short term rates of less than ½ of 1%, but it will look pretty paltry when rates move up well above those rates.

The most basic element in Inflation protection is to stay away from locked in returns. More important, where should funds be invested? An inflation protected portfolio will include investments whose returns are flexible and will tend to increase as inflation occurs. Each portfolio, designed to provide inflation protection, will be a bit different, depending on age, risk tolerance, need for income, etc. However, there are types if investment alternatives that should be included no matter what.

Floating rate funds invest in loans whose interest rates are tied to external measures of interest rates, like the Consumer Price Index.  This means that the rates will go up as inflations occurs. The government issues TIPs or inflation pegged treasury securities. Once again, these will move up with the predominant interest rates measures. Investments in natural resources, precious metals and other exhaustible resources also tend to track inflation. There are a number of funds that provide diversified investments in these areas. As we have all seen, energy prices tend to rise with inflation, so this is another area to be included in the portfolio.

Note that we stress funds as the vehicle to use. This provides diversification and protection against selecting poor performing companies in market sectors that are doing well We will send copies of the specifics from the portfolios. Please contact us at anadolna@associatesgroupinc.com