Interest rates are low now and so is reported inflation. However, inflation may return if the U.S. prints money to cover its debts; higher inflation, in turn, probably will lead to higher interest rates as lenders seek greater returns to protect the purchasing power of their future income.
Higher interest rates mean lower values for bonds and bond funds. Therefore, your investment portfolio should include some holdings that will appreciate if inflation heads north. Such holdings include so-called hard assets, which may gain value during inflationary times.
One approach is to buy stocks in individual energy, metals, and mining companies. They have risks that relate to each company, though. Instead, you might prefer to own a diversified fund that owns a mix of such stocks.
* Morningstar’s picks include Vanguard Energy and Vanguard Precious Metals and Minerals, two mutual funds with excellent long-term records.
* Another option is iShares S&P North American Natural Resources Sector Index ETF, an exchange-traded fund that holds energy, metals, and mining stocks based in North America.
Such funds are likely to do well if higher inflation boosts prices of commodities and makes hard asset companies more profitable. Gains there may balance any losses in the bonds and bond funds you hold.
