Inflation Investing for 2011

For the past couple of years, I have been musing about how to plan for future inflation, especially in creating a sound investment strategy.  Interestingly, rather than inflation, the last couple of years have experienced some price declines, especially in real estate and certain asset prices.  And yet the irony is that many assets that were targeted for strong performance due to inflation such as commodities and non-US$ investments have performed really well  With the US Federal Reserve announcing a round of quantitative easing to attempt to stimulate the economy, it seems worthwhile to examine select investments again:

–Commodity related investments — with global growth, especially from China and India, still going strong, commodities have had a huge run up, especially gold and silver.  With this in mind, I have pared back some precious metals holdings and am looking instead to industrial commodities and possibly agricultural commodities.

–Emerging markets — one of the most volatile of the asset classes, emerging markets have performed well in the past 2 years.  With global growth continuing to look strong, my view is still to be overweight emerging markets.

–Real estate — although many local real estate markets have declined substantially, real estate remains a low liquidity investment.  Thus, for speculative reasons, real estate doesn’t seem that attractive.

–Bonds– bonds, especially high quality bonds tend to underperform when inflation is high.  After the decline in stock markets in 2008, many people switched their retirement assets into bonds for safety reasons, with enough people piling in that long-term rates in the US are near historic lows and many analysts are calling for a bond bubble.  I think high quality bonds are one of the assets that risks a large correction in the next 12 months, so I will be underweight here.