The forces that kept inflation low since the early 1980s are fading. In time, the Fed will have to take stronger measures than anticipated by investors and Fed officials, suggests Bob Carlson, editor of Retirement Watch.
In early 2022, market pricing indicates investors expect inflation to fall after modest interest rate increases that won’t substantially reduce economic growth.
Investors are looking backward, expecting the next year to closely resemble the pre-pandemic period. A better approach is to expect surprises, be sure all investments have a margin of safety, and be broadly diversified.
Global growth and inflation should continue to benefit mining company stocks, which we own through iShares MSCI Global Metals and Mining Producers (PICK). We added the ETF after it tumbled in the second quarter of 2021, and it has been recovering nicely.
Mining company stocks also should benefit from the significant restructuring many companies undertook in recent years. Most now can be profitable at relatively low prices for commodities, and profits will grow as commodity prices increase.
PICK follows an index of global mining companies that excludes precious metals companies. It holds 216 stocks, but 47% of the fund is in the 10 largest positions.
Real assets and inflation hedges have had ups and downs the last six months. We own a package of them through DWS RREEF Real Assets (AAASX). The fund is allocated between Treasury Inflation-Protected Securities (TIPS), REITs, broad commodities and gold.
The managers change the allocations of each category based on their view of where we are in the investment cycle. They also change allocations of the securities and commodities in each asset category based on analysis of each.
The fund has had a long history of successfully making these tactical changes and being among the top performers in its category. AAASX is down so far in 2022 but is up 19.36% over 12 months. The yield recently was 2.46%.