Sitting Out Inflation/ Deflation

by Minority Fortune

The economic market has been experiencing a lot of volatility. For the average investor, it’s a rollercoaster of gains and losses. It seems that amidst all of the confusion, there’s no certainty in which way the wind will blow tomorrow. What should you do?

Defining inflation/ deflation


How do you know which one you’re experiencing? Well, with the credit crunch and the Fed printing lots of money, you’re likely to be experiencing inflation. That’s when the value of money has sunk against the price of market goods. Gold is a solid asset that retains value. The valuation of money reflects in the gold price. When the dollar is weak, the price of gold will rise. On a smaller scale, you notice rising prices in the commodities that you buy in the grocery stores.

Deflation can also result when a government has printed out too much money and interest rates are too low. The money rises in value, and the price in goods are lower. While this would make any average individual happy to see their money carry further, it’s a government and corporations worst nightmare.

Strategies

There are certain tactics that are tried and true. If you’re investing for the long-term, you can continue to buy and hold in valuable stocks. Markets always have a way of bouncing back after the calamities have sorted themselves out. They also keep up with inflation and provide decent to exceptional returns.

If you’re looking for short-term investment solutions, Gail Bebee over at Globe and Mail provided several gameplans as options:

You want to own hard assets, things like gold and other commodities, commodity-related stocks, real estate and the stocks of companies with the ability to raise their product prices at or above the rate of inflation. These investments all entail some risk.

If you want “safer” fixed income, consider real-return bonds, bonds with a built-in adjustment for the inflation rate. A real-return bond exchange-traded fund such as XRB, iShares Canadian Real Return Bond Index Fund (XRB:CN), which has a management expense ratio of 0.45 per cent is a cheap, easy way to accomplish this. You could also consider the relatively new Inflation-Linked Bond Fund (MER 0.8 per cent) from renowned fixed-income mutual fund company, Phillips, Hager & North. It is also possible to buy real-return bonds directly through a discount or full service brokerage.

So is it inflation or deflation that we need to worry about in the coming years? No one really knows the answer to this question yet. Probably the best approach is to maintain a diversified portfolio and keep a watchful eye on changes to the Consumer Price Index (CPI). If the CPI rate rises above 2 per cent and shows signs of accelerating, start to adjust your portfolio for an inflationary world. If I’m wrong and deflation takes hold, cash is king.

In the Forex world, advanced investors may want to hedge bets against currencies that are overextended and overpriced. Governments that are printing out money mercilessly will lead to their currency’s devaluation, and it can lead to sexy profits for investors in the know. Also, it might be of interest to buy the currencies of countries with financially sound policies. However, there haven’t been many currencies that have been spared in that regard.

The main thing to remember is stick to your goals. Don’t react in fear or excitement. If you are investing in the long-term, buy and hold. If you are investing short-term, stick to sound investment strategies. Keep paying yourself first and educating yourself along your wealth journey. You’ll be destined for success!

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