November 27, 2010

Is inflation on the horizon? How about deflation? Do you know? A lot of people are so it is becoming difficult to know where to put your money. In an environment like this I believe that you should consider alternative investments. Although none of us know for sure of what will happen it doesn’t mean that we shouldn’t do something about it.

Holding cash during times of inflation is a good idea. In deflationary times cash actually increases in value. This is one of the reasons that policy makers don’t like deflation. People stash their cash. They don’t buy goods as they know they will be able to buy them more cheaply if they wait and as a result the economy slows down even more.

So is cash better than alternative investments in deflation? The answer is maybe. Even though we may get deflation, the policy makers and the Fed in particular want to avoid that at all costs. They are trying to achieve that by using the printing presses to print money. Even though the money might not be in the wider economy, it is in the financial markets. They will want to put the money where they think they will get a return for it and that may be in alternative investments.

Although there are two camps of thought on the inflation/deflation issue, the majority of people have the belief that it will be inflation. In a scenario like this alternative investments tend to do quite well.

Whatever happens we are surely going to see a bumpy ride in the stock market, I am pretty certain of that. Alternative investments are usually pretty unrelated to these movements. You will be able to hedge part of the risk that you hold in equities.

No one can be sure of what will occur in the future. As a result you need your assets to be allocated in a way that can protect you. A way of doing that would be to have some alternative assets in your portfolio.