How to Profit from Inflation

By Doug Hornig, Senior Editor, Casey Research
In today’s shaky economy and jittery investment markets, investors may well find that their best moves are not discovering the next big thing or a fantastic value, but simply avoiding serious, and costly, mistakes.
Here are ten of the most common mistakes we see investors making everyday, and how to avoid making them yourself.
#10. Being “all in” on equities.
Stocks are what most people know the most about and where they have most of their money. Some have only a handful of stock-filled mutual funds or ETFs in their IRAs, pension funds, or 401(k)s. Others actively manage their portfolios and have a basket of their own personal picks.
But time and again we hear from investors who are effectively betting the farm on equities, with 80%, 90%, or even 100% of their investable assets in stocks. Ignoring their age, their risk tolerance, and even their better judgment at times, these investors take the easy bait from their 401(k) provider and load up on a “diversified” portfolio with a growth fund, a value fund, a few index funds, some large-caps and some smalls, and maybe even a dividend fund to boot.
No matter how you slice it, these are all stock market investments, and that market is not a wise place to put the entirety of your assets. Nor a safe one. When market sentiment moves in a big way, virtually everything flows in the same direction – a painful truth for investors who endured the 2000 and 2008 crashes. During the century’s first decade, in fact, even low-interest CDs outperformed the S&P 500 and other market indices.
The investors who did the best wisely kept a good portion of their portfolio in cash or elsewhere outside of equities. They lost far less in the big crash of 2008 and were able to quickly snap up bargains in the aftermath because they weren’t flat on their backs.
Most of the people who remained “all in” in 2009 were the same way in 2008, and the recent, massive market gains didn’t even get them back to level. It was those who had the foresight to hang on to some reserve cash who truly benefitted from the rebound. The same is true today. Those with the free capital to invest after the next big downturn will profit handsomely.
#9. Being “all in” on bonds.
The opposite of those who have piled all their money into equities because it is easy or because they are chasing the phantom rally. Stock market jitters have driven many out of the equity markets entirely and into the perceived safety of bonds. However, bonds are anything but safe. In fact, with interest rates at ridiculous record lows, they are probably at peak value right now.
With the potential for deflation still on the near-term horizon, some are even making a speculative bet that bonds are the place to be, as they assume that rates will absolutely have to stay low in that environment. Of course, many of these same investors thought that housing prices would continue upward forever.
When interest rates do rise again – and they will eventually – bonds will be crushed as prices move in the opposite direction. And it can happen quickly. It is sheer vanity to assume that one can exit just in time. Especially since these things tend to go in the opposite direction precisely when gains are the highest and we’re most pleased with our choice.
#8.  Being “all in” on the U.S.
Few Americans look outside their borders for investment opportunities, and that’s very nearsighted.
The U.S. economy is on the ropes, has been for some time, and might continue to be for some time to come. Despite trillions of dollars in stimulus money, it has failed to be very stimulated. We’ve entered a period of no to low growth that could last for years. Thus putting all of your eggs in the basket marked American Recovery is a risky thing indeed.
Even if the recovery charges ahead at full steam, it is safe to say that the American economy, given its massive size, will not be the fastest or most nimble in the world. For years now, even during the headiest of times, our growth has been far outpaced by other countries.
More growth is happening in the emerging nations than anywhere else, and world markets are more accessible than ever before. Investing in them gives you exposure to that growth, along with a potential currency kicker (booking bigger gains in other currencies if the dollar falls, or letting you benefit when you convert back after selling if the dollar rises). China, India, Brazil, Mexico, Korea, Taiwan, Argentina, Hong Kong, and Indonesia have all outpaced the U.S. in GDP growth rates for the past decade, and appear poised to continue to do so for some time – if not them, then other emerging economies.
And speaking of currency, it makes no sense to hold all of your cash in dollars. Washington’s spending spree bakes future inflation into the cake. Which means future dollars will have considerably diminished purchasing power. Diversifying out of the U.S., by holding currencies of countries with more conservative fiscal policies, is a prudent thing to do.
#7. Not owning gold.
Gold was the premier investment of the past decade, increasing in value each and every year. Parking as much as a third of your liquid assets in physical gold that you directly control is imperative. Gold can’t go bankrupt. It’s been the world’s universal currency since the invention of money. And it cannot be inflated away by creating it out of thin air.
Gold is money. It embodies money’s two most basic characteristics, serving as both a medium of exchange and a store of value. In a sense, it competes with paper and digital “monies.” As their value declines with inflation, gold’s will rise.
While even gold may be given to price swings based on fluctuations in investor sentiment, the overall trend is up. Gold won’t provide the spectacular returns of a stock that suddenly catches fire. But over time, holding it is one of the tried and true ways of preserving wealth.
#6. Ignoring politics.
No one can afford to ignore what goes on in Washington. This is true even though the vast majority of what happens there is useless if not downright counterproductive in terms of improving the lives of ordinary citizens (i.e., those not well connected politically).
The federal government has insinuated itself into virtually every corner of our lives. There are few days that don’t result in yet another rash of rules and regulations. Businesses are forced to comply or die. They can prosper or vanish dependent upon whether Washington favors or restricts them. They may even be taken over and run by government itself, with taxpayer money.
This is a dreadful situation, but trying to ignore it or fight it with your investment dollars is not going to help your portfolio. If legislators suddenly enact a hefty beet tax, then you can confidently invest in beets; growers will be squeezed and the price of beets will go up. If they instead announce vast new beet subsidies, then you want to go short; more beets will be grown than are wanted, and the price will drop.
The same principle, unfortunately, applies to everything.
#5. Trusting the government.
This is the flip side of the previous no-no. Assuming that the people running government economic policy know what they’re doing is lethal. Assuming that government can fix anything that goes wrong is lethal. Assuming that it’s just a matter of time before they figure out the right levers to push is lethal.
Just look at what they’ve already done, and what the results are.
#4. Leveraging up.
If your investments are down, the absolute worst thing you can do is leverage yourself in order to try to get back to even. Leverage is the single most important reason the economy is in the mess it’s in today. You don’t want to use that as your model. Do not throw good money after bad.
#3. Making judgments based on anxiety.
There are two fears that drive investors to make really bad decisions. One is the fear of missing out. Staying out of investment markets is difficult, because that makes you no money. But there are times when preserving capital can be at least as important as making a nice return on it. Times of great potential volatility, like today. In those times, keeping at least some capital poised patiently on the sidelines can be the wisest course.
The other is the fear of doing anything at all. Investment paralysis. Because so little is clear right now, it’s easy to get caught up in this one and opt out of the markets entirely. Or just idly sit back, holding what you always have, because it’s easier than figuring out what you should really do.
Both are deadly.
But even in the worst of markets, there are opportunities. For instance, technology progresses, recession or no recession. Companies bringing out breakthrough products are doing just fine. Other companies that steadily post strong earnings can get beaten down to where they’re real bargains.
The trick is to be selective, find great companies, and buy them cheap. Let market dips driven by other people’s anxieties bring the price down to a level where it would be difficult to lose money, then pounce.
Making investment choices simply out of fear is a really poor idea. But at the same time, you don’t want to go to the other extreme, becoming overconfident. Know that you cannot discover some magical formula for beating the market. There isn’t one. Be always wary. Be skeptical. Continually review your decisions to see if the basis on which they were made remains sound.
Invest without emotion.
#2. Buying with the herd.
If you hear about it on CNBC, the money’s already been made. And that’s all you need to know about that.
#1. Assuming the worst is behind us.
This is no ordinary recession. Never before have we seen a downturn that has affected virtually the entire world at once. Nor a world where so many governments have assumed such massive debt loads, leveraging their currencies in a desperate attempt to defibrillate their economic hearts.
But it’s not working. Overspent governments from New York and Greece to California and Spain are collapsing under their debts. Millions of unemployed Americans have all but given up searching for jobs. And the U.S. government is looking down the barrel of trillions of borrowed dollars it has no hope of ever repaying.
Unlike a normal dip in the business cycle, this is a massive liquidation of malinvestment that resulted from decades of living beyond our means, piling debt upon more debt. Those imbalances must be wrung out of the system, and they will be. The financial market demands it.
Assuming that this is an ordinary recession, and that if you’re patient your investments will just “come back,” is the worst sin an investor can commit today.
Make no mistake about it, the whole coming decade will be a hard, bumpy ride. So take the steps today to prepare yourself and your portfolio for what’s to come.

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If you closely review the above-mentioned points, there’s only one possible conclusion: You need to get at least some of your money out of the United States. And that is not “Whenever you get around to it” advice anymore – the window of opportunity is closing for those who want to protect their assets from the long and ever-growing arm of the government. Learn all about the 5 best (and perfectly legal) ways to internationalize your wealth – details here.