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Let Inflation Buoy Your Portfolio
We all invest, trade, or speculate for what, on the surface, seem like different reasons. Some say they are looking for current income while others target a large nest egg at retirement. Be it through long-term gains, dividends, or trading profits.
However, when you simplify it even more than that, we are all looking for the same thing. That is to maintain or increase our purchasing power, the ability to buy goods and services, be in now or in the future.
Inflation Brewing
The biggest enemy of value is inflation and unfortunately the current economic crisis, which seems to be unraveling (hopefully), has set us up for a potentially crippling inflationary environment. The Fed's primary tool to curb inflation is raising rates, making money more expensive to borrow.
In a drastic effort to dampen the financial crisis, central banks have made money easier to borrow. Interest rates remain at all-time lows, essentially 0%! While this reeks of upcoming inflationary pressure, there is no sense in worrying about that when a global collapse is immanent.
So, obviously there is nowhere to go but up, and sinking the value of money with it. But what can we do? We can hedge against that inflation. While TIPS or Treasury Inflation Protected Securities are a good tool it is difficult for everyday investors to hold, there are other avenues to gain access to this haven, as well as some other securities that will hold their value.
Stave Off Inflation
A relatively new investment tool that is rapidly gaining popularity is the exchange traded fund, or ETF. SPDR Barclays Capital TIPS (IPE) tracks the index for inflation protected Treasuries. This is an obvious choice that is has both high credit quality and interest rate sensitivity.
But I Want More
While TIPS are the best inflation protection, they are also the lowest risk and, as we all know, the lowest reward. So, if you are looking to maintain some upside potential along with that inflation hedge, lets find a few funds that could do the trick.
"Tangible" assets are another source or protection. Look for companies that hold gold, energy, or other assets that rise with inflation. Using the Zacks Mutual Fund Rank I have come up with some top-rated funds that specialize is those areas.
Which Fund?
I used the Zacks Mutual Fund Rank to find these individual funds,
Vanguard Energy (VGENX) carries a Zacks Mutual Fund Rank of #2. The fund holds more than 80% of its assets in companies that produce, transmit, or research energy source. Additionally it invests in pollution control and energy conservation companies. Be sure to look at the holdings relative to yours as it can invest entirely in foreign stocks.
USAA Precious Metals and Minerals (USAGX) also has a Zacks Mutual Fund Rank of #2. This fund parks its money in stocks that mind, explore, and process gold, silver, diamond and other precious resources.
In Closing
You have worked too hard to keep your portfolio in shape during the current recession, do not let inflation make it all for not. By adequately diversifying your portfolio to benefit, or at least hedge, from inflation you will be doing yourself a huge favor.
Additional Resources
Zacks Mutual Fund Rank Trial - Sift through thousands of mutual funds to find the right fit for you.
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| Market Summary | Mar 10, 2010 11:47 am ET |
-11.18
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Mike, VDE wasnt included because it does not have a Zacks Rank. All else being equal, you are correct it could be a good alternative to avoid redemption fees.
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http://www.tradingstocks.net/html/latest_opinion.html
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On the other hand, the Vanguard Energy ETF (VDE) has the same portfolio holdings and an expense ratio of 0.25%. And, of course, this ETF does not carry the price of admission that its mutual fund sibling does.
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