Here’s a tip for a long-term investment strategy: Diversify your portfolio with different types of asset classes to help reduce risks and create a more efficient portfolio. Owning different assets classes, like stocks, bonds, real estate and various alternative investments can reduce the fluctuations in your portfolio’s value, because they don’t move in tandem with one another, while you keep driving toward your investment goals.
Since the U.S. and global economies, as well as financial markets, are constantly changing, it’s a good idea to review your investment portfolio with your advisor on a regular basis. That way you can do some “nip and tuck” adjustments to your holdings, adding funds to certain asset classes that have good prospects in the future. You just have to be careful about following the herd. If everyone you know is loading up on emerging market stocks, for instance, you might want to sell a portion of your shares for a profit and put those funds into an underperforming asset class.
Right now, investors are paying little attention to the risk of inflation because interest rates remain at historically low levels and the Consumer Price Index is holding steady. The Federal Reserve’s recent announcement that it would continue to stimulate the U.S. economy through its quantitative easing (QE) bond buy-back program was a clear signal that inflation is not yet a worry for financial policymakers.
But there are still plenty of risks to the nation’s economic recovery, including the conflict in Syria and ongoing tension in the oil-producing Middle East. A sudden rise in the price of oil, a natural disaster that affects agricultural commodities or monetary problems in one or more of the emerging markets could trigger an inflationary spiral. Many economists believe that the United States keeping interest rates low for such a long period of time could lead to hyperinflation.
A favored strategy for addressing inflation while still maintaining a conservative investment approach is to add TIPS (Treasury inflation protected securities) to an already diversified portfolio.
Introduced by the Treasury in 1997, TIPS are designed to guard against inflation, and are backed by the “full faith and credit” of the U.S. government.
Available in terms of 5, 10 and 30 years, TIPS are designed so that the principal increases, based on changes in the “Consumer Price Index for All Urban Consumers” or CPI-U. If inflation causes the index to rise, then the principal goes up as well. On the other hand, if the CPI-U goes down, the principal also declines.
But as with any type of asset class, there are times to increase your allocations to TIPS and times to pull back. In my December 2010 column, I advocated adding to your TIPS allocations because they appeared to offer attractive pricing. At that time, many investors were looking to buy other types of assets rather than TIPS.
Then, in my February 2012 column I suggested selling some of those TIPS at a profit because many investors had grown concerned about inflation and were pushing up the prices on these securities.
If you want to protect against inflation or simply have a “contrarian” approach to investing, the timing may be right to increase your allocation to TIPS. Since the investment world is focused on other issues at the moment, TIPS may offer a relatively good value. Since prices are already starting to rise in several areas of the economy, it may be better to be “ahead of the curve” than to join the crowd as another “me-too” investor.
Andrew Menachem, CIMA, is a Wealth Advisor at the Menachem Wealth Management Group at Morgan Stanley in Aventura and teaches at the University of Miami. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors.