What do boy scouts, military commanders, parents and financial planners have in common? They must be prepared or at least have a plan for anything. The headlines are splashed with calls for inflation, deflation or worse yet – another market crash. The question is are you prepared? Life is full of plans and surprises so it is best to be prepared for many scenarios. Accordingly, if we do see one of the above scenarios unfold it is best to have an idea where to run to.
Inflation
With inflation we will likely see rising rates. Rising rates can ravage a bond portfolio. The obvious way to protect a bond portfolio is through inflation protected bonds such as TIPS. Another way to protect a bond portfolio from inflation is to shorten up the maturity of your bond portfolio to short and ultra short bonds.
In addition, gold can be a nice inflation protection play. Energy is also a solid choice to hedge inflation as energy figures into the cost of everything. Since oil and gas are priced in dollars, as inflation rises it tends to raise the price of energy and the stocks of energy providers. Food commodities tend to act like energy stocks and chase inflation up. Food prices are a first to rise in an inflationary environment which allows food companies to boost revenues before their costs go up.
Deflation
In a deflationary environment long-term government bonds and investments in the U.S. dollar are solid choices. Deflation is usually accompanied by poor stock market returns but there are some opportunities such as high quality, dividend paying stocks, food producers, and health care stocks that will likely give some protection. In a deflationary environment the best thing is to hold on to the money you have as it will be worth more down the road.
Market plunge
In a market plunge long-term U.S. government bonds, the U.S. dollar, high dividend paying stocks and cash are the plays. Since many global stock markets are now very much correlated, when turmoil hits investors seek the safety of U.S. bonds and U.S. dollar investments. Take a look at the charts of ticker symbols TLT and UUP when the market crashed in late 2008.
A plan to use
Below you will find a link to my scenario portfolios. Like any financial planner worth his/her salt, I have a plans in place should any of the above appear upon us. HERE is the link to the scenarios portfolios.
Disclosure Statement: ETFGPS is a blog that Navigates The World of ETFs. Sustainable Investment Strategies LLC is a Registered Investment Adviser in the State of Maryland, and does hold positions in tickers TIP, VWO, TLT, and GLD at the time of writing. Investors who are interested in money management services may visit the Sustainable Investment Strategies LLC web site.