A recent New York Times article profiled two rival camps of economists; the Deflationistas and the Inflationistas. Simply put, the former see the greatest danger facing the U.S. economy as a downward spiral of decreasing prices and wages, with consumers putting off purchases and focusing on their debts and savings. The latter believe the opposite will happen: Prices will rise, along with some wages, and the dollar will become worth less and less, cutting into the hard-earned nest eggs of responsible savers.
For an inflationista, gold and other precious metals are often the ideal investment, though they see some upside in stocks. When currency, like the dollar, loses value, the price of assets like gold and silver will tend to rise, because each dollar buys less metal.
Deflationistas are bond men and women all the way: When the dollar is worth more, fixed income investments that pay out a certain nominal sum become more valuable.
It’s not really possible to have a portfolio which is inflation- and deflation-proof; you have to pick one over the other. But you can hedge both, by holding certain assets.
U.S. Treasury notes and investment-grade bonds make a good base for any portfolio, and they’ll perform exceptionally well in a deflationary environment. So will cash: You get more bang for your buck when prices are falling.
Buying some precious metals and shares in companies that mine gold and silver will help protect you against inflation. In addition, blue-chip companies that offer low-priced goods often do well in inflationary environments, as do companies that sell household necessities: think Costco (COST), Johnson & Johnson (JNJ) and McDonald’s (MCD).
A portfolio’s performance isn’t just dependent on its constituent parts – sometimes, you need to step back and assess the broader economic picture.