Fight Inflation with Real Assets

While vacationing in Florida last week, I met up with an old friend from my high school days. I won’t say exactly how long ago that was, but we are among the few people that can boast that our four-year high school tenure spanned three U.S. presidents (Nixon, Ford, and Carter).

That historical oddity aside, the 1970s had a lot of other unusual things happening, too. In 1973 President Nixon officially untethered the U.S. dollar from the price of gold. At that time, the price of gold was fixed at $35 an ounce.

History has proven Nixon correct in believing the economy could prosper without the help of gold. However, we paid a big price in the short run. Inflation soared, driving up interest rates and unemployment to previously unthinkable levels.

Read This Story: Straight Talk About Inflation

My friend asked if such a scenario is possible again given the Federal Reserve’s hawkish pivot towards monetary policy. Like many folks our age, he has spent the past 40 years amassing a sizable nest egg that he can’t afford to lose now.

We’re too old to ride out the type of stock market deterioration that crushed investors 50 years ago. From its peak in 1966 to its nadir in 1981, the Dow Jones Industrial Average fell by more than 70%.

If that historical precedent doesn’t get your attention, then you’re either very young or very rich. Almost nobody our age can survive a hit of that magnitude for so long to their retirement account.

A Different World

Of course, the world is a much different place now as are the global financial markets. Instead of worrying about the price of gold relative to the dollar, we wonder if cryptocurrencies such as Bitcoin (BTC) will eventually supplant the dollar altogether.

That is one reason that my friend is contemplating buying some Bitcoin to diversify his investment portfolio. The way he sees it, better late than never.

I’m not so sure I agree with him about that. The folks that bought Bitcoin two years ago when it cost less than $10,000 clearly got in at the right time.

But during the past year, Bitcoin vacillated from a high above $68,000 to below $29,000 to wind up right where it started near $40,000. That is precisely the type of volatility that my friend is hoping to avoid.

If he really wants to minimize the risk of a big loss, my friend should do just the opposite. He should not load up on a single, unproven alternative investment. Instead, he should diversify across a wide spectrum of known quantities.

With that in mind, I shared with him my simple, time-proven approach to guarding against rampant inflation. If inflation comes roaring back soon, this portfolio should hold up relatively well.

Inflation Friendly Portfolio

My inflation-friendly portfolio consists of three professionally managed funds:

  • The Fidelity Global Commodity Stock Fund (FFGCX) – This mutual fund’s assets are equally divided between energy, metals, and agriculture. Historically, the prices of those commodities have increased during periods of rising inflation.
  • iShares Floating Rate Bond ETF (FLOT) – Adjustable-rate bonds aren’t paying much interest these days, but they will pay more as the Fed raises interest rates to fend off inflation. More importantly, the value of these bonds should remain steady since their coupon rate is not fixed.
  • Vanguard Real Estate Index Fund ETF (VNQ) – This fund is broadly diversified across the full spectrum of real estate investment trusts (REITs) including office buildings, hotels, data centers, and residential properties. Real estate tends to appreciate faster during times of rising inflation, and owning equity REITs is an easy way to participate.

You won’t earn much current income from this portfolio. Last week, the average annual dividend yield was roughly 1.3%. But the value of this portfolio should hold up relatively well while inflation is high. In fact, it could appreciate while the rest of the stock market is losing ground.

That should work for my friend since he has sizable assets to protect. But it may not work for you, especially if you need to earn high stock market returns under all market conditions.

For that, I refer you to my colleague Jim Fink.

Jim Fink is chief investment strategist of the elite trading services Options For Income, Velocity Trader, and Jim Fink’s Inner Circle. He has agreed to show 150 smart investors how his “paragon” trading system could help them earn 1,000% gains in just 12 months.

We’ve put together a new presentation to explain how it works. Click here to watch.