Invest for Inflation or Deflation? Act like a Trader and it doesn’t matter – December 3, 2009

 

Is deflation or inflation coming? Investors need to know because the portfolio to chose is dependent. If inflation is coming, then equities should be OK, commodities, inflation adjusted long term bonds and short-term interst rate vehicles are the way to go.  If deflation is coming, then you’ll want to stay out of equities and commodities and park your money in long-term bonds and utility stocks. The problem is that we just don’t know which way to invest at the moment. Both the Deflationists make compelling arguments.

 

The solution –stop thinking like a long-term investor and start thinking like a trader. With a portfolio of diverse ETFs or funds, you can use a mechanical system that rides the areas that are hot and gets out of the areas that are performing poorly.  Take for instance the following group of ETFs:

 

1. SPY – S & P deposit receipts

2. EEM – Ishares MSCI Emerging Markets Index

3. QQQQ – Powershares QQQ (NASDAQ 100)

4. IOO – IShares Global 100 Index

5. XLU – Utilities Select S & P

6. DBA – Powershares DB Agriculture

7. GLD – SPDR Gold Shares

8. USO – United States Oil

9. TLT – iShares Barclay 20+ Year US Treasury

10. TIP – IShares Barclays TIPS Bond

11. IEF – IShares Barclays 7 – 10 Year Treasury

12. IYR – Dow Jones US Real Estate

13. IOO – IShares Global 100 Index

14. DIA – Diamonds Dow Jones Industrial

15 – ILF – Ishares Latin American 40 Index

 

Allocating 10% of the porfolio equity to the above using a simple 180 or so moving average envelop system (180 day average, buy at plus 5%, sell at minus 5%) will produce good returns while avoiding those asset groups that underperform. You’ll note that their are more than 10 ETFs. This allows for near full investment even when a funds are underperforming and not to be invested in.  Although historical results do not guarantee future results, over the past 10 years this strategy resulted in superior results over being fully invested in these funds. 

 

So, rather than waiting to act until you know whether inflation or deflation is coming, just invest in a well diversified portfolio and don’t worry about it.