Stocks are not an ideal short-term hedge against rapidly increasing inflation, but bonds are worse. Bonds are promises to pay in dollars, and those dollars are fixed unless you hold Treasury inflation-protected securities or other IOUs that adjust their payments with changes in the general level of prices. In an inflationary environment, investing in short-term bonds is better than investing in long maturities; as inflation rises, you can take advantage of rising interest rates.
|"The closer you get to retirement, it might be wiser to increase the allocation to income producing investments over more volatile investments."|
Gold and commodities also do well in periods of high and increasing inflation. But, like bonds, they have poor results over the long term. Gold, for example, has returned only 0.7 percentage point per year more than inflation over the past two centuries.
A strategy for insulating your stock portfolio against inflation is to diversify internationally. If inflation kicks into overdrive, the dollar will fall and foreign stocks will act as an automatic hedge as money invested in foreign currencies is translated into more dollars back home. But don’t run to speculative assets that will deflate in price when inflation slows. For long-term investors, stocks may be an excellent hedge against rising prices.
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