Preparing for Inflation

Jason Hsu, chief investment officer at Research Affiliates, a Newport Beach, Calif., investment-management firm, thinks inflation is on the way. Maybe not in the next year or so, but he says the market could start pricing in the risk ahead of time.
"Investors should be worried about long-horizon inflation," Mr. Hsu says.
Commonly suggested inflation hedges include mutual funds and exchange-traded funds that invest in Treasury inflation-protected securities and in securities linked to commodity prices.
Within the stock market, meanwhile, Mr. Hsu likes property-focused funds that invest in real-estate investment trusts, or REITs. Such funds have had a big run in 2010, gaining about 19%.
In part, that is due to a rebound from depressed levels after the housing bust. It's also a bet that property values will recover once inflation picks up, Mr. Hsu says. He favors REITs that focus on residential property over commercial property because he believes residential REITs fell far more sharply and represent a better bargain now.
One housing-focused possibility among ETFs: iShares FTSE NAREIT Residential Plus Capped Index.
Morningstar Inc. analyst Christine Benz says investors worried about inflation should consider stocks with exposure to commodities. Exxon Mobil Corp. or ConocoPhillips fit that bill. Big energy companies also tend to spit out a healthy dividend, providing benefits during deflation. The steady payments provide a welcome safety net when prices for other assets, including stocks, are on the wane. For more information visit www.theretirementgroup.com

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