If you were one of the investors that bought mutual funds ten years ago in a set-it-and-forget-it type deal and haven't readjusted it yet, now may be the time to recheck your portfolio and realign it with the long-term fundamentals. Here are three areas that you can focus on.
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1. TIPS - Falling Dollar
Many U.S. consumers won't realize it, but today each dollar in their pocket is worth approximately 12% less than it did in December 2008. The 30-day moving average of the U.S. Dollar Index has declined steadily from 86.41 in December to about 76.29 this October with more signs of trouble on the horizon. The Independent reported in early October that a secret meeting among Arab states took place discussing plans for a transition away from the U.S. dollar for oil based transactions - with China being a vocal participant.
This news comes on the heels of a recent announcement by Iran, in which they said they would now hold euros instead of dollars for its foreign currency reserves. I wouldn't completely write off the dollar yet, but there has definitely been an escalation in the call for a new reserve currency.
With that said, investors should probably look to allocate resources away from long-term bonds. Short term (less than a year) should be ok, but avoid fixed rate long-term bonds. As long-term demand for the dollar weakens, long-term bonds will get hammered as inflation rises. Investors insisting on investing in bonds should look at investing in Treasury Inflation Protected securities (TIPS) that will guard against a rise in inflation rates. An example of a few good vehicles for this may be an ETF that invests predominantly in TIPS, such as the iShares Barclays TIPS Bond ETF (NYSE:TIP) or the SPDR Barclays Capital TIPS (NYSE:IPE).
2. Growth - China
Earlier this year, Chinese construction equipment manufacturer Tengzhong Heavy Industrial Machinery Co. bought the famous Hummer brand from General Motors for $150 million. Although not significant by itself, the acquisition is an indication of the type of consumers the Chinese desire to be. The Hummer was a symbol for overconsumption and largesse, and the U.S. seems to have passed this torch on to China.
If you don't already have exposure to the Chinese economy, consider dollar-cost averaging into some funds that mimic the performance of China's top companies. For example, one possible fund could be the iShares FTSE/Xinhua China 25 Index Fund (NYSE:FXI). This fund tries to match the performance of the FTSE/Xinhua China 25 Index, which represents 25 Chinese companies chosen for size and liquidity. (For more on China, see Investing In China.)
As a corollary to investing in China's markets, investing in commodities would be a logical addition to your asset allocation strategy. Asia will continue to need resources to fuel its growing economies and generally commodities also provide a good hedge against inflation. As mentioned previously, as consumption patterns of the U.S. flow over to China and Asia, the pace of consumption should significantly outpace the growth of new resource reserve discoveries.
Look at investing in the major commodities such as oil, natural gas and metals like iron, aluminum and even gold. An ETF that tracks the movements of these resources can be used such United States Oil Fund (NYSE:USO) or United States Natural Gas Fund (NYSE:UNG).
Alternatively, you could invest directly into companies that mine and produce major commodities. Looking across the border to Canadian companies will also diversify some of your currency holdings away from U.S. dollars, which is probably a good thing.
The Bottom Line
These are just three general areas most investors should look at that warrant considering increasing your allocations in. If you hold long-term bonds (5-30yrs), it's probably wise to accept a lower interest rate to protect yourself from potentially high inflation. The 21st century will also belong to China in terms of economic growth and investors should get some exposure to that through Chinese companies or commodities.
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