AboutJohn D Smith, CFP Expertise I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related financial planning/investment issues. I have a B.S. degree in Financial Planning & Counseling. I am also a Certified Financial Planner (CFP) and have performed fee only investment management and financial planning services for the past 11 years.
Question Can you recommend the best hedges against a possible severe weakening dollar/high inflation? I currently own stock in some large international American companies such as XOM, IBM, HPQ and MCD. I also own some global/foreign ETFs such as IXG, EFA, VWO and RWX. Are there other, better ways to meet my my objective (that I state as a question above)? Would you offer some suggestions? Thanks in advance for your response.
Answer Hi. If you are looking strictly for a hedge against a weakening dollar, then you could purchase shares of ETF's in other currencies that you expect strengthen wersus the US $. An example of this is FXE for the Euro. Another way to benefit from a declining dollar is to invest in foreign securities (unhedged), assuming you feel these foregin securities, whether they be stocks or bonds, will perform well on their own merit. As you may know, a declining $$ enhances international performance for the investor who invests with US dollars.
In regards to inflation, TIPS (Inflation Protection Bonds) can offer a nice inflation hedge because you are guaranteed a specified return over inflation. If inflation is greater than what is anticipated when you purchase, then your investment will increase by a greater amount. If inflation is less than anticipated, you still earn the stated rate over inflation. Historically, another hedge against inflation has been commodoties. However, I would not invest in commodities for excess return as much as I would for diverisification reasons.
It is imortant to keep in mind that inflation is driven mostly by wage/spending pressures; i.e. the more people earn the more they spend which causes prices to go up. Although the economy appears to be on the mend, it is still very likely that unemployment will remain high for quite some time. Assuming this is the case, consumer spending should remain low so it will be difficult for merchants to raise prices (i.e. inflation). In my personal opinion, I do not feel inflation should be of great concern for 1 1/2 - 2 more years. I hope this helps.
