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Inflation or deflation?
Even the experts can't agree whether rising or falling prices lie in our future.
That leaves investors in 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. That is OK: Buying insurance doesn't mean you actually want to use it.
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 - even if it is down the road. And the third is aimed at investors who believe the economy will muddle through without severe inflation or deflation.
Inflation
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.
Since commodities contracts can be a hassle for individual investors, consider a fund such as Pimco's CommodityRealReturn Strategy Fund, which offers exposure to a broad swath of industrial and agricultural commodities.
Though it seems counterintuitive, cash can do pretty well Synthetic Lace Wigs, too. The Federal Reserve would likely fight rising inflation by pushing up short-term interest rates, allowing investors with cash to capture the escalating rates through short-term certificates of deposit and money-market accounts.
Michele Gambera, chief economist at Ibbotson Associates, says his research shows that in the last five bouts of meaningful inflation, returns on cash essentially matched the inflation rate, meaning it isn't losing its purchasing power. Online banks and local credit unions tend to offer the highest rates.
Treasury inflation-protected securities, or TIPS, are an obvious investment since their principal adjusts upward along with inflation. TIPS exposure is available through mutual funds, such as the Vanguard Inflation-Protected Securities Fund , though Steven Fox cartier watches, director of forecasting at Russell Investments, notes that holding individual bonds to maturity is more effective as an inflation hedge since 'the majority of the inflation protection comes when the inflated principal is repaid.' Individual TIPS are available through brokerage firms or TreasuryDirect.gov.
Sharp inflation is generally a negative for stocks, because rising interest rates potentially pinch corporate profits and undermine economic growth. But a few stocks will likely do fine. Start with energy and metals stocks because higher prices for their commodities will boost earnings, says Mark Kiesel, a managing director at Pacific Investment Management Co., or Pimco. Include as well US firms with pricing power, such as regulated utilities, domestic pipeline companies and manufacturers of specialty materials. Examples of companies to consider : miners such as Freeport-McMoRan Copper & Gold and energy giant Exxon Mobil, or companies indirectly tied to commodity prices, such as driller Diamond Offshore Drilling, farm-equipment company Deere and seed supplier Monsanto.
- 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 be an attractive source of income as prices for goods and services broadly fall, and as paychecks shrink. And Treasurys , in particular, would likely become a haven for foreign investors, further pushing up their price.
Deflation
Portfolio preparation is easier for deflationists: Put a chunk of money into long-term Treasury bonds and much of the rest into cash and some municipal bonds.
If broad-based deflation materializes, long-term Treasurys are likely to surge. The bonds' fixed-income stream, meanwhile, would be worth increasingly more relative to falling consumer prices.
Some investment-grade municipal bonds could serve a similar role while also providing tax advantages for high-income earners. But beware: Deflation would likely mean some taxing authorities struggle to service bonds reliant on a specific income stream, like user fees. Instead, stick to 'investment-grade bonds tied to necessary services like water and sewage, power or necessary government offices like, say, a courthouse building,' says Marilyn Cohen, president of bond-investment firm Envision Capital.
Round out your deflation portfolio with a big slug of cash. Though it won't generate much of a return in a low-rate, deflationary environment, cash in the bank will gain value as prices fall.
- Insurance Component: Commodities react most drastically to surprise inflation, so they should be part of your insurance. Add in TIPS Fashion Synthetic Wigs, too, and stocks geared 'toward consumer-staple companies,' says Ibbotson's Mr. Gambera. If inflation arises, companies such Coca-Cola, tobacco giant Altria, and toothpaste maker Colgate-Palmolive will have some pricing power.
Goldilocks Economy
Maybe, just maybe, world bankers will get this right, and the economy will experience neither severe inflation nor severe deflation.
'We think most likely the central banks of the world will get this close enough to right that we will settle in close 'to a relatively benign inflation rate of between 1.5% and 2.5%, says Aaron Gurwitz, head of global investment strategy at Barclays Wealth.
In such a 'Goldilocks' scenario - where the economy is neither too hot nor too cold - 'risky assets would do best, so equities and bonds with some equity characteristics should receive the emphasis,' says Scott Wolle, portfolio manager of the AIM Balanced-Risk Allocation Fund.
That means broad exposure to large-cap and small-cap US stocks through funds such as the Vanguard 500 Index Fund or the Bridgeway Small-Cap Value fund; and exposure to developed and emerging markets through funds like the Vanguard Total International Stock Index Fund (mainly developed markets), and the T. Rowe Price Emerging Markets Stock Fund.
For the bond component, pick a fund such as the Fidelity Total Bond fund that largely owns high-grade , intermediate-term corporate bonds and mortgages, along with government and agency debt.
- Insurance Component: Just in case the Goldilocks scenario is wrong, you will need insurance against either inflation or deflation. Pick up inflation protection through a commodity ETF, and deflation protection with long-term Treasurys. Cash also is OK in either situation.
will be waiting for us then is that inflation or deflation?
Even the experts to the price in the end to rise or to fall divided.
This gives investors a difficult question: In such an uncertain economic prospects under the current situation, how to build your own portfolio. Under the wrong note, be hit would be fatal. For example, your portfolio is based on expectations of deflation, then if inflation occurs, your assets will be lower than that.
best solution is, as you think most likely to invest in the economy, while taking some insurance measures.
Schwab (Charles Schwab) financial consultant Rich? Rosso (Rich Rosso), said that to win the war, fighting both for how much you have to cast point data.
take this investment, then no matter how the economic situation, you will have some assets damaged. No problem: non-insurance does not mean you can not use it.
the following three are considered within the portfolio of insurance elements. The first is the best combination of performance in times of inflation, deflation hit Shique not cause collapse. The second for those who expect deflation, but also hope to deal with inflation, investors will encounter ─ ─ even shrink. The third is aimed at those who believe that economic development is moderate, neither have serious deflation, inflation would not be a serious investor. Inflation-based investment

If you think a government should be spending the economic crisis will eventually lead to inflation, then you certainly want your portfolio when the price increases have a good performance.
investment in commodity futures can be a heavy head, because by the time crude oil, grain, copper, the price of pork bellies are up. Moreover, commodity ─ ─ ─ ─ especially the gold to hedge U.S. dollar, it was expected, the weak dollar and inflation in the situation, investing in gold can bring double benefits.
the commodity futures is very troublesome for individual investors may wish to consider investing in funds such as Pacific Investment Management Company (Pimco) commodity real return strategy fund, which covers a wide range of industrial and agricultural commodities.
Another option is the cash investment, as it may sound incredible, but the cash investment can also have good performance. After inflation, the Federal Reserve (Fed) is likely to be taken to improve the response to short-term rates, investors in short-term certificates of deposit and money market accounts will have a good interest rate.
Ibbotson Associates chief economist Michelle? Gang Bola (Michele Gambera), said his research shows that in the far-reaching impact of inflation over the past five, the storage of cash inflation rate of return is basically the same balance of , that is, did not reduce the purchasing power of cash. Internet banking and credit unions around the highest rate normally provided.
Treasury inflation protected securities (Treasury inflation-protected securities, called TIPS) is obviously a good choice, the principal will increase with the rise in inflation. Can operate through a number of mutual funds, such as the Vanguard inflation-protected securities fund, but the forecast Russell Investments director Steven? Fox (Steven Fox) said that individuals hold bonds to maturity is a more effective means to hedge against inflation because \
for stock investments, the rapid inflation are often played a negative role, because interest rates are likely to hit corporate profits, leading to slower economic growth. However, there are a handful of stocks will perform well. Managing Director of Pacific Investment Management Company Mark? Kessel (Mark Kiesel) said, might as well start with the energy stocks and metals shares, as energy and metals prices will make it gains substantially. There are also those with the pricing of American companies, such as government regulation of public utility companies, domestic oil and gas pipeline companies, specialty materials manufacturer. The company can be considered: mining companies, such as Freeport-McMoRan Copper & Gold, energy giant Exxon Mobil (Exxon Mobil), or indirectly with the commodity price associated with companies such as Diamond Offshore Drilling, agricultural machinery giant Di Seoul Company (Deere), seed company Monsanto (Monsanto) and so on.
Insurance elements: long-term bonds and municipal bonds
two bonds will rise in price deflation, as in the goods and services slashed prices, shrinking pay the case, both the long-term fixed income securities will be a substantial amount of revenue. Especially the U.S. national debt to foreign investors when the popular favor, further impetus to the price being.
type
deflation deflation were to build a portfolio of relatively more easy: most of the money can purchase long-term U.S. government bonds, the remaining money, part of the existential, part of the purchase of municipal bonds.
deflation becomes a reality if the large-scale, long-term bonds will likely rise. Meanwhile, bond prices fixed income associated with the consumption of increasingly close.
some investment-grade municipal bonds can also play a similar role, as well as bringing a high income tax benefits. But remember: In the case of deflation, and some trouble may be difficult to repay the department since the user fees and other specific revenue bonds. Bond, president of Envision Capital investment institutions Marilyn? Cohen (Marilyn Cohen) said, you can choose \. \The cash in the bank at low interest rates, deflationary environment, does not produce significant gains, but with falling prices, cash is actually appreciate.
Insurance element: if inflation unexpectedly human hair wigs, there will be the largest commodity futures gains, so it should be as an insurance measure. Also have to consider purchasing inflation-protected bonds, according to Ibbotson Associates of the Gang Bola views, the stock will have to tend to \If inflation outbreak, Coca-Cola Company (Coca-Cola), the tobacco giant Altria Group (Altria) human hair wigs, toothpaste maker Colgate - Palmolive (Colgate-Palmolive) and other companies will have the pricing power.
Goldilocks economy
possible, just maybe ─ ─ bankers around the world are very aware that this is neither ─ ─ economy nor serious inflation, severe deflation.
Barclays (Barclays Wealth) Aaron global head of investment strategy? Gewei Ci (Aaron Gurwitz), we believe that central banks will eventually inflation rate is likely to remain relatively modest level, that is, between 1.5% and 2.5 %, respectively.
AIM Balanced-Risk Allocation Fund portfolio manager Scott? Waller (Scott Wolle) said that in the \performance, the nature of stocks and bonds with equity should be the focus of attention. \and other funds acquired; can also be Vanguard Total International Stock Index Fund (mainly for developed countries, the stock market), T. Rowe Price Emerging Markets Equity Fund and other funds purchased shares in developed markets and emerging markets.
bond portion can choose a fund, such as Fidelity Total Bond Index Fund Lace Wigs, which holds a mid-grade corporate bonds, mortgage loans and government and government agency debt.
Insurance elements: assumptions about the Goldilocks economy is expected to be wrong, then you need to resist the double risk of inflation and deflation. May acquire commodity exchange traded funds to deal with inflation, long-term bonds to deal with deflation. Cash is the two cases can deal with magic.