advertisement
The collapse of the U.S. housing market has many implications, and all of them are bad for mom-and-pop investors.
First, it slows the pace of domestic economic growth, which puts a ceiling on domestic stocks. Then, as the Federal Reserve slashes interest rates to combat this concrete threat to prosperity, it leads to downward pressure on the dollar, which is already down 35% against world currencies since 2001.
That in turn leads to higher prices -- inflation -- in all the corners of the world the Fed can't control, from OPEC to China. The sum of all these forces leaves investors with only two options, says John Brynjolfsson, manager of Pimco Real Return Fund (PRTNX, news, msgs) and a leading authority on Treasury Inflation-Protected Securities (TIPS).
"One is to invest in hard assets, like commodities, and in TIPS," he says. "The other is to literally divest from dollar-denominated assets and invest in instruments that are underweight U.S. dollars," like foreign stocks and bonds.
Bullish for bullion
Along with many economists, Brynjolfsson believes it will take years for mortgage contagion to spread throughout the world's financial and trading systems, and between now and then we've got ample time to accomplish this repositioning.But inflation fears are already toning up such traditional inflation hedges as gold and commodities. Importantly, a growing proportion of the world's customers make their purchases of jewelry and iron ore in euros, yen and, especially, Chinese yuan. A price spike that will surely mute U.S. demand for these products could be a blip for their more robust currencies.
StreetTracks Gold Shares ETF (GLD, news, msgs), which represents bullion and therefore reflects the spot price of the metal, is up 16.9% this year, as of Oct. 1, dwarfing the 9% return of the S&P 500.
If inflation fever is infecting you, it's time to bulk up on hard assets and foreign securities. Exchange-traded funds have made it particularly easy to target specific niches, such as gold bullion, energy and other commodities.
More from MSN Money
Generation Wave Growth Fund (GWGFX), which largely pursues demographic trends like the aging of the baby boomers, has moved 8% of assets into what manager Allen Gillespie calls his inflation-hedge basket.
"This is oil-service stocks, gold-mining stocks and TIPS," he explains. Energy will benefit in coming years because, he notes, the dollar is the benchmark currency for oil trading, and as it goes down, oil prices go up.
My personal portfolio, as well as the model ETF portfolio I maintain at MSN Money, already has a substantial allocation to energy, commodities and, especially, foreign stock funds. If you haven't embraced these assets yet, it's time.
Building a strategy
Even if you have, however, you can buttress your inflation protection in at least these key areas:- TIPS. These can be substituted, at least in part, for your conventional bond holdings.
- Gold. Funds and one ETF target mining stocks; the StreetTracks fund owns the metal itself.
- Energy. Funds and ETFs abound, including some that let you target individual industries, like oil-field services.
- Commodities. ETFs offer the most choices here.
- Real estate. Particularly attractive is foreign real estate, which is available in new ETFs.
Inflation-protected bonds were first offered in the 1990s, but they have taken on fresh luster in today's market. Brynjolfsson's mutual fund, with assets of $11.57 billion, is by far the largest. An ETF that can be bought for a brokerage commission, rather than a sales load, is iShares Lehman TIPS Bond (TIP, news, msgs).
Through a combination of their principal value and their interest, these bonds follow the Consumer Price Index; hence the "real return" in the Pimco fund's name. Having gained an average of 3.44% in each of the last three years, ended Sept. 26, it is up 5.06% this year. The iShares ETF, up 3.70% for three years, is ahead 5.49% this year.
By contrast, the overall bond market is up much less. The iShares Lehman Aggregate Fund (AGG, news, msgs), which follows this broad market, is ahead 3.39% in three years and 3.35% in 2007.
Continued: Gold, energy, commodities and real estate
Rate this Article
High
