THE BLOG
03/21/2010 05:12 am ET Updated May 25, 2011

Maybe Lusha Can Help You Hedge Against Inflation

An article in the U.K. Daily Mail reported that Lusha, a chimpanzee in Russia, outperformed 94% of the country's investment funds. Her portfolio increased by 300% in the last year.

It occurred to me that Lusha could counsel investors how to deal with the inflation they are so confident is coming. I have no doubt her advice would be superior to what investors are getting from most of their "investment professionals."

Before succumbing to the gold rush, consider these facts about inflation:

  1. If everyone really believes inflation is inevitable, stock and commodity prices have already factored that belief into current prices. Specifically, that means that gold is fairly priced today. The reality is that no one knows whether the future will bring inflation, deflation or a continuation of the status quo.
  2. Stocks are a good hedge against inflation. The historical data does not support the commonly held view that stock prices are closely correlated to inflation.
  3. Short term bonds are a good hedge against inflation. They reduce overall volatility of a portfolio (thereby increasing total return). Holding short term bonds permits investors to take advantage of increasing interest rates.
  4. Treasury Inflation-Protected Securities adjust principal to reflect changes in the Consumer Price Index. Holders of TIPS are able to preserve their buying power.
  5. Commodities, like gold, are more volatile than stocks. Contrary to popular belief, the price of commodities does not always rise with inflation. Also, gold doesn't create profits or have any of the other fundamentals that affect the price of stocks. When you buy gold, you are speculating that its price will increase in value. You may be right or wrong, but remember this: As I stated above, gold is fairly priced today, based on all available information and the expected return of speculation is zero.

How does Lusha deal with commodities? She has a globally diversified portfolio of stock and bond index funds. The stock index funds include companies involved in commodities.

I have given Lusha the Solin 5 banana rating, but her past performance is not an indication of future returns.

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