Own Real Assets

With all the bailout money circulating around the globe, the risk of future inflation is real. In order to protect yourself from the coming inflation, you need to own real assets.

What shouldn't you own? Cash, bonds and other IOUs will lose value during an inflationary time.

You can think of them as anything that you can see, feel, and touch. Examples would be real estate including residential, commercial, and land.  Commodities such as oil, gold, and agricultural products are considered real assets.  Even ownership interests in businesses related to such products can be used to hedge against inflation provided those business can maintain pricing power and increase prices as all other costs increase.

Real assets are more than just stuff.  Real assets should keep their value during times of inflation and increasing prices.  Think back to the recent surge in oil prices.  Anybody owning oil or oil company stock did well assuming they were able to sell at the top.  Some of the increase may have been speculative but the same principles apply in an inflationary environment where there is more money relative to the supply of a certain product.

Real estate prices are falling right now because there is just too much supply.  Investors were buying lots of houses and condos that they never intended to live in and projects were being built which made no economic sense.  Once the supply overhang is alleviated, however, the availability of the large amount of bailout money will eventually work its way through the economy and bid up prices for all goods and services.  It may take several years, but now is the time to start purchasing these investments.

What you don't want to be holding is cash or anything that has a fixed income stream.  The problem is that in an inflationary environment, you lose purchasing power.  It doesn't matter much if gas is $1 per gallon or $10 per gallon.  The money is just an arbitrary mechanism of exchange.  What matters is the effort required to obtain that money in exchange for gas.  How much of my physical time and effort was required?  How does that relate to my overall purchasing power and net worth relative to my frame of reference (which is the culture of the United States)?  How is my lifestyle being impacted by the cost of gasoline?

If the value of my other assets are increasing in proportion to the cost of goods and services, the whole thing is a wash.  But, cash and bonds with fixed payments will undoubtedly lose purchasing power during inflation.  That's why it is important to consider investing in some hard, real assets when the economy is bad and those assets are cheap.  Buy low and sell high!