BlackRock: Get Inflation Protection Now

Sunday, 08 Sep 2013 12:48 PM

By Michelle Smith

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Inflation is not a theory investors should doubt and decide to handle on sight. It's a “fact of life” that should be planned for, and investors should get protection now, warn BlackRock managers.

There's a notable lack of concern about inflation. BlackRock Managing Directors, Michael Douglas and Philip Green, concede that inflation expectations will likely remain low for the some time, and that inflation may not be the most pressing and immediate threat.

But it is nonetheless a certainty, and inflation must be a “perpetual consideration for investors,” they said in a recent report.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

The managers pointed to the extended period of quantitative easing in the U.S. and very accommodative central bank tactics around the world. These policies will lead to an acceleration in growth, and they will also beget inflation.

The unprecedented amounts of monetary stimulus injected into the economy over the past few years will most certainly have an impact on an investor's inflation-adjusted returns (also known as real returns) over the longer term, write Douglas and Green.

Even at a moderate pace, inflation will take a toll on investors, the Christian Science Monitor warned separately. A $1 million portfolio in 1990 would take more than $1.75 million to replicate today, it said.

Inflation is worrisome not only because it erodes purchasing power but also because it tends to creep up and catch investors off guard. Some appear to expect bold announcements and time to prepare, but  the BlackRock managers suggest many are in for disappointment.

Inflation data are not the first place investors will notice inflation, the managers warn.

Investors will feel it first – in the rising costs of goods and services.

According to Time, investors may already be getting the signal. Long-term interest rates are rising, and that's often a leading indicator for the price of goods and services, the magazine says.

Incomes are not keeping pace with the rising costs of essentials, say the BlackRock managers.

“Inflation cannot be combated through a rear-view mirror; it has to be planned for before it picks up. We think investors should be building that insurance into their portfolios now," they added.

Numerous assets can be used, but the managers advise investors to consider the limitations of each individual “inflation fighter.”

It's best to develop a multi-asset portfolio that adapts to different market environments, they say. The effectiveness of single-asset-class inflation hedges can vary dramatically based on market conditions.

They can introduce high volatility and their valuations can change significantly over time. Therefore, the managers stress the importance of flexibility in an inflation protection plan.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

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