The business section of the papers is currently buzzing with all sorts of talk on “stagflation.” But don’t get caught up in the hype just yet unless you know what this could mean for your portfolio. Essentially, a stagflation is a condition of high unemployment caused by or correlated to a slow economic growth – hence, a time of stagnation. The “flation” part comes from the inflation, or rise in prices, that occurs during an economic downtime. At the moment, we are looking at a situation where inflation not only runs higher than normal – the economy is slowing down dramatically as well. Stocks will start dropping in value not only because of the slow economy, but also because average fixed income investments will be unable to keep up with the climbing inflation rate. But don’t panic just yet – it is still possible to invest during a period of stagflation.
Here’s how you can protect your portfolio from the ravages of the recession:
- Be very careful. Don’t get too excited about great deals that may come your way. Perform as much research as possible before deciding to invest in a specific corporation.
- Look for investments that combine price appreciation and income, thus making you rise above inflation expectations.
- No matter what the economic condition is, exchange traded funds or ETFs are one of the best things to invest in, especially if you foresee currency depreciating in the near future.
- One of the best things you can invest in during a period of high inflation is natural resources. Non-renewable natural resources like gold, silver, and uranium move higher and will help you outperform the market. Gold is a thinner market with wildly fluctuating prices, so you have to be careful when investing in it – it can be an opportunity of huge profit, but it can also be a big risk if you become too greedy. Look into SPDR Gold Shares Trust as protection against inflation, but make sure you don’t buy too much. Silver is just as risky as gold, but you might do better.
- Another investment that’s worth looking into are Treasury inflation protected securities or TIPs, and commodities.
- You could also try making a money-market fund, especially during the early stages of the stagflation. The interest rates are still lower than the inflation rate. This will make you lose money in real terms while making you pay taxes. But as soon as stagflation really kicks in, long-term and short-term rates start climbing. Because they get reinvested after three months, you earn higher interest rates, giving you the chance to keep up with the inflation’s pace. During the later stage of the stagflation, when the government becomes more serious about stopping it, the interest rates climb higher and faster than the inflation rates, making your money-market fund very profitable even when other investments aren’t.
- Do NOT invest in bonds. The inflation will make you end up losing your principal’s value, making your bonds’ actual cash values decrease while interest rates climb up.
Remember – try not to buy too much of these inflation-fighting vehicles. While there are lots of opportunities to protect yourself from inflation, too much of a good thing will be more detrimental to your portfolio.