All-Suitable Investment Wisdom
Even the experts can't agree whether rising or falling prices lie in our future.
That leaves investors in a quandary how to construct a portfolio at a time of great uncertainty? A wrong bet could be devastating. If your portfolio is built for deflation, for example, your assets will slump if the country instead experiences a bout of inflation.
The answer is to prepare for the economic scenario you think is most likely, and then build in some insurance in case you are wrong.
"If you want to win the war," says Rich Rosso, a financial consultant at Charles Schwab, "you have to own both sides of the fight to some degree."
Such an approach necessarily means some investments will suffer no matter how the economy turns.
Here are three portfolios, each with built-in insurance. The first will do best in an inflationary period but won't be crushed if deflation instead rules the day. The second is for investors who fear deflation, but want some protection against potential inflation. And the third is aimed at investors who believe the economy will muddle through without severe inflation or deflation.
If you believe all the government spending in response to the financial crisis will ultimately beget inflation, you want a portfolio that thrives in a period of surging prices.
Commodities are the primary play, because everything from oil and corn to copper and pork bellies should gain. Plus, commodities-particularly gold-hedge against the dollar, offering a 2-for-1 benefit if a weak dollar accompanies inflation, as some expect.
Insurance Component; Long-term Treasury bonds and municipal bonds.
Both will likely soar in value amid deflation because their long period of fixed payments would bean attractive source of income as prices for goods and services broadly fall, would like paychecks shrink. And Treasury papers, in particular, would likely become a haven for foreign investors, further pushing up their price.