The reason many investors are skeptical about this stock market rally is because a little word called INFLATION has not reared its ugly head on our country’s economy. Don’t believe anyone when they say that inflation will not take it’s toll on our economy in the long term. We have spent money that we don’t have, so that means we printed money out of thin air without any backing. Check out this graph from the Heritage Foundation:
As you can see, the spending has run rampant when Republicans were in control of Congress and now when Democrats are in control So, the blame definitely crosses party lines. So as a smart consumer and investor, you need to start thinking about adding some investments that hedge against an increase in inflation.
Inflation Protected Treasury Bonds
These treasury bonds pay interest adjusted for inflation. The 20 year rate is about 2.4% above inflation. The rate isn’t great, but having about 5 or 10% of your tax-sheltered portfolio in TIPS could be a good hedging strategy.
I am not a big fan of gold, because it has a horrible long-term track record, but in the past five years, we have seen unprecedented government spending, so I think it’s a good idea to have a small percentage invested in gold to hedge against inflation. Instead of buying gold coins and hiding them under your bed, put some cash into an ETF that tracks the price of gold such as GLD.
Sell Long-Term Bonds
source: Wall Street Journal
Sell any long-term bonds, too. A bond guaranteeing 7% a year for 30 years won’t be worth much if inflation hits 10% and CDs starting paying 11%. Treasury bonds have sold off sharply, but corporates haven’t. The yield gap between long-term investment grade corporates and 30-year Treasurys, which was nearly 5% in mid-January, has fallen to 3.5%.
Of course, if the stock market continues to do well while inflation increases, your money is better left in the stock market than in cash. The problem is that your stock market gains will be less, because inflation will eat up your gains. I am not saying that you should go out and buy a bunch of inflation-protected investments products, but just keep it in your mind, because it’s inevitable given our massive federal debt load.