Political events, social changes and natural disasters can affect certain financial markets for better or for worse. And since these events can affect individual investment portfolios as well, it?s important to be prepared for downturns in the market. Certified financial planner Matthew Chope of Raymond James Financial Inc. suspects that events like the war in Iraq and hurricane reconstruction in the Gulf will have a slightly negative effect on the economy. ?Chances are that we are headed toward a high-inflation econo-mic environment,? he says. He backs up his suspicion by pointing to the measured interest-rate increases of the Federal Reserve, the high national debt and the high trade deficit.
Inflation Impact
So how does the threat of infla-tion affect traditional investments? ?Generally speaking, companies will have a hard time keeping up with their long-term averages,? Chope states. ?An increase in the cost of goods?a result of inflation?can have a slowing effect on the economy. A slower economy likely would reduce a company?s earnings, forcing them to eat their costs.?
While it is not wise to dump all equities, most financial planners would advise against putting all of your eggs in the same basket. If inflation is a threat?which is debated in some circles?it would make sense to balance your portfolio with alternative investments.
Options
Here are a few options. Keep in mind that because each individual?s financial situation is different, it is prudent to confer with a financial adviser to determine which investments match up with your current holdings and tolerance for risk.
Commodities. Commodities are physical substances, such as food, grains and metals, which are interchangeable with other products of the same type. Examples include energy (oil, gas, coal), industrial metals, precious metals, grains and livestock. Commodities are available through many different mutual funds. John A. Kvale, president of J.K. Financial Inc., suggests an investor should put about 10 percent of his or her equity position in a pool of different commodities to achieve a well-balanced portfolio. ?Commodities are directly an inflation hedge, but they tend to be very volatile,? he says.
Energy. Anyone who has filled their vehicle?s gas tank in the past year can attest to the rapid rise in gas prices. Crude oil, natural gas, gasoline and heating oil have all been trading near record highs in the past year. One reason for this is the rising industrialization of China. China recently increased its need for energy, which has increased competition and sometimes strained companies? supplies. An investor can take advantage of this trend by being advised of certain energy stocks or funds positioned to handle this increasing demand.
Gold. Part commodity, part currency and part jewelry, gold throughout most of the world?s history has been seen as a store of wealth. Generally speaking, the value of gold increases or decreases opposite the dollar?s gains or losses. Investors who believe the dollar and U.S. economy are weakening are more likely to invest in gold than the investor who believes the dollar?s value will increase over that of other currencies.
Diversifying
Regardless of personal beliefs, more financial planners, including Chope, believe a properly diversified portfolio should contain about 5 percent investment in precious metals, whether it is a precious metals mutual fund or mining stocks. Possession of gold coins or bullion is another option, but taking this route comes with additional costs and concerns in storing and securing your investment. Other alternative investments that might complement your portfolio include government-issued Treasury Inflation Protected Securities, international mutual funds and Exchange Traded Funds.