The Bureau of Labor Statistics announced on July 16 that the Consumer Price Index climbed a half percent in June, the biggest monthly increase since February. Investors have long worried that the Fed Reserve’s aggressive monetary stimulus and easing would spark big price increases. But excluding volatile food and gas prices, inflation was up only 1.6% in the past year, amounting to the smallest change since June 2011.
In any case, however, some investors are still preparing for the threat of higher inflation in the coming years. Bill Hammer Jr., CFP, president of the Hammer Wealth Group and author of the 7 Secrets of Extraordinary Investors, says investors looking to hedge against inflation often run to commodities. Although it’s hard to generalize about commodities as a whole, they tend to hold their value in times of inflation.
“If you’re an investor who believes all this (money printing) could lead to higher rates of inflation, commodities could be a way to play it,” he says. “History shows that when prices rise, commodities tend to do so as well.”
Morningstar portfolio manager Brian Huckstep says many investors may have some inflationary protection already built in to their portfolios. For many, salaries and federal benefits checks are usually adjusted for inflation annually. And although stocks may suffer in the short term, they typically have a positive correlation with inflation. As prices rise across the board, so too do revenues and cash flows.
In any case, there’s no need to panic, head for the doors and start dramatic allocation based on the fear of inflation, says Mari Adam, CFP, president of Adam Financial Associates in Boca Raton, Fla. She believes when it does come, commodities will still remain a safe haven, but she cautions against trying to “cherry pick” individual commodities. Adams recommends buying an ETF that offers broad, diverse exposure to a wide range of commodities.
“Most commodities might move in tandem, but not all,” Adam says. “I would avoid trying to pick individual (commodities or companies) and find an ETF or mutual fund with a diverse (range of holdings).”
BetterInvesting is a national nonprofit organization that has been empowering individual investors since 1951. Founded in Detroit, the association (formerly known as National Association of Investors Corporation) was born out of the conviction that anyone can become a successful long-term investor by following commonsense investing practices. BetterInvesting has helped more than 5 million people become better, more informed investors by providing webinars, in-person events, easy-to-use online tools for analyzing stocks and mutual funds, a monthly magazine and a community of volunteers and like-minded investors. For more information about BetterInvesting, visit its website at http://www.betterinvesting.org/investing/landing/openhouse/blog/index.html or call toll free (877) 275-6242.