How To Hedge Your Investment Portfolio Against Future Inflation

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Investing and saving used to be a rather straight-forward venture. As long as you put away a fair amount of money every year, the stock market promised to multiply your savings by at least 8%-10% annually, and after a solid 30 year career, the average American was able to retire rather comfortably. This buy-and-hold investment mentality ruled the second half of the 20th century, and for those Americans who retired in time (pre-August 2008), it worked quite well. Today, however, things are different. The stock market returns of the 20th century will most likely not repeat in the 21st century. Nearly 5 years later, U.S. home prices are still far below their market HI’s of 2007, and the stock market is still belowits HI’s of 2008. With all of this economic uncertainty, investing and saving for retirement is especially difficult. Over the last few years, the Federal Reserve has injected over $2 trillion into the U.S. economy in the form of quantitative easing measures. This rapid increase in the Federal Reserve balance sheet has caused alarm within the investment community, and many professionals believe it will lead to rapid inflation in the future. Rapid inflation, of course, erodes the purchasing power of the U.S. dollar. Therefore, not only do astute investors need to save money and invest for the long-term, they also need to protect these investments against rising inflation and even the possibility of hyper-inflation in the future.
How To Do This In our current global economy, it is important to understand that money is never destroyed. Rather, it shifts from asset to asset. For example, if hyper-inflation hits the United States and significantly devalues the purchasing power and relative value of the U.S. dollar, then capital will flow into assets that act as inflationary hedges, such as commodities like gold and silver.

The best way for most investors to hedge their investment portfolios against the possibility of hyper inflation is to buy gold and silver exchange traded funds, such as SPDR Gold Shares (GLD) and iShares Silver Trust (SLV). These two vehicles will appreciate as the price of gold and silver appreciate.

Another way to hedge against inflation is to simply bet against the U.S. dollar. There are several ways to do this. An investor can simply exchange a portion of his U.S. dollars for higher yielding currencies that tend to do well during times of inflation, such as the Australian dollar and New Zealand dollar, or investors can bet against the U.S. dollar directly by purchasing shares in exchange traded funds that increase in value as the U.S. dollar decreases.

The best way to do this is to buy shares in PowerShares DB US Dollar Index Bearish (UDN). This ETF will increase in value as the U.S. dollar sells off. If you do not want to be directly selling the U.S. dollar, there are other etf’s that offer a more non-direct hedge against U.S. dollar weakness, such as the PowerShares DB G10 Currency Harvest Fund (DBV) and WisdomTree Dreyfus Emerging Currency Fund (CEW).

The risk of inflation is legitimate. The Federal Reserve actions over the last few years may lead to significant inflation in coming years, and by hedging one’s investment portfolio by gaining international currency exposure, one may remove significant risks from one’s portfolio.

Author bio: Sara Mackey represents forexfraud (, a leading guide in the field of personal investing with a focus on currencies. She has over a decades worth of experience in finance.