Are you a baby boomer and thinking about inflation-hedging investments? There are the all time classics such as: gold, real estate trusts and also energy! These are all very good examples. But this might be dangerous thinking at the end of 2016. Here is why :-
Throughout history, in the stock market there has been rather large bouts of high inflation and low inflation. Conditions in the real world never mimic themselves in the stock market. So you must always realise that. There is not straight forward answer. Sometimes tried-and-true inflation-hedging asset classes are not always the secret answer.
Here are 3 very important things to remember.
1. Gold is getting pummelled right now.
Though considered a good hedge against inflation, gold is going down quite quickly. What has accelerated it, is the fact that TRUMP is now going to be the president. People are too quick to say BUY the dip without realizing some of the problems that are surfacing, one that Donald Trump could kill the gold rally even more.
If you look at the current gold chart, and compare that to the US dollar, you have noticed the US dollar is currently skyrocketing, and the gold is getting squashed like never before. Infact, buying the dip would not be a very astute thing to do. That is because as you read this, Gold has just suffered its worst month since the month of June back in 2013, and we are down close to 8 percent since November 2016. Many investors have learnt from the past, you do not buy gold when it dips, because more times than not a dip can sometimes turn into a crash of sorts.
2. Past performance can fool people.
What happens in the past is not indicative of what happens in the future.
Gold, REITs are very "real assets" and has rallied quite nicely in the last 10 years. You get to a point where that will need to flatten out or take a break at some point.
You also have the problem that many people who have invested in gold over the last decade are revelling in profits and will want to cash out soon. It could be an over invested asset and many do not see the danger signs. Because gold has been rallying for decades now, people think they just sit and buy gold right now and it will keep rising and rallying at the same rate each year. This is incorrect thinking and how investors have been hoodwinked and lose lots of money.
Morningstar newsletter surveys are now predicting realized return expectations for major asset classes like gold over the next decade, and gold, REITs are projected to do worse than inflation-protected bonds. In simple terms they are much riskier than bonds.
Sometimes when you look at gold investors, inflation hedges are like rules of thumb because they might have worked in the past and they will sit and sucker-punch investors back into old trades, which can leave them with huge losses on their investment sheets.
Most investors who do well in this space almost always make sure they have a diversified portfolio.
3. Never overdo it!
The most common mistake with any investor is that they try to reconfigure an investment portfolio when they are doing well. They will hunt stocks, and commodities that are the flavour of the month. Especially if someone thinks Trump will make gold a good investment they will hurry in without thinking of the real results and the agenda of a Trump presidency or what the fed will be doing over the next 4 years.
In a projected statement by the fed, they are predicting that the CPI will go from 1.6 to over 2 next year. Wages have climbed over the last year and have actually risen faster than inflation. If that really is the case, this would be a clear sign that the FED will not raise rates next year in 2017.
Ultimately, if this actually does happen, investors will want to come back to stocks and not gold. As when you look at previous data, that has been the best long-term bet.
What many people do not understand is that innovative companies are usually the best investments in this type of environment we are seeing and under a Trump republican presidency. The reason being is these sorts of companies take it upon themselves to invest in the future, and future infrastructure. Sure we also need to take inflation into account. That is a must. However if you are a growth type investor companies who are constantly updating, changing with the times and innovative would be where strong profit potential really is.
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