Several weeks ago, Federal ReserveChairman Alan Greenspan testifiedbefore Congress, expressing hisviews on the state of our economy. In hispresentation, he continued to voice concernabout inflation in the United States.His remarks, along with those of anynumber of respected analysts who areexpecting a ho-hum stock market for2005, provides plenty of incentive forinvestors to look around for nontraditionalinvestment options. Traditional equity-styleinvestments that may do well in aninflationary environment include realestate, commodities, and gold.
Gold has long been thought of as ahedge against inflation, but research indicatesthat this is not a foolproof strategy.It appears that, historically, gold does verywell during inflationary times only about60% of the time. If you want to buy goldfor your portfolio, consider an exchangetraded fund (ETF).
The iShares COMEX Gold Trust is designedto provide investors with a simpleand cost-effective method to gain exposureto the price of gold in an investmentportfolio. The trust is designed to reflectthe day-to-day movement of the price ofgold bullion, minus trust expenses. Sharesof the trust will be listed on the AmericanStock Exchange under the symbol IAU andmay be purchased and sold at market pricejust as you would with any stock. Theexpense ratio on this ETF is 0.4%.
Real Estate Advantage
One of the more popular investmentvehicles used as a hedge against inflationhas been real estate. Here again, you maywant to consider the advantages of anETF, including tax efficiency, low cost ofdiversification, high liquidity, and excellentasset allocation properties due totheir low correlation to the stock market.One of the best-known ETFs in this arenais the iShares Cohen & Steers RealtyMajors Index fund, which has over $1.3billion in assets and a low expense ratio of0.35%. In 2004, this investment was up35.2%, along with a 21.1% return sincethe investment's inception on Jan. 29,2001. Investors may want to be somewhatcautious. Real estate investment trustshave had tremendous runs over the past 5years, and there is some concern that realestate may now be overvalued.
The next couple of years may prove tobe particularly challenging for investors.It's important to note that Alan Greenspanis actively attempting to stem the tide ofgrowing inflation. If he is successful, theseinflation-hedging tools may prove to beineffective. You should work closely withyour financial advisor, keep a close eye onwhat is occurring on the inflation front,and be prepared to adjust your portfolio,depending on how the economy moves.
is the founder of the Welch
Group, LLC, which specializes in
providing fee-only wealth management
services to affluent retirees
and health care professionals
throughout the United States. He is the
coauthor of J.K. Lasser's New Rules for Estate
and Tax Planning (John Wiley & Sons, Inc;
2001). He welcomes questions or comments at
800-709-7100 or visit www.welchgroup.com.
This article was reprinted with permission from
the Birmingham Post Herald.
Stewart H. Welch III, CFP