Maintaining Purchasing Parity During Inflation
Many times I have been speaking about the fact that inflation is a wealth destroyer. To give an example that all too many investors experienced is take for example $1,0000 invested in S&P 500 on January 1, 2000. This $1,000 was worth $750 at the end of July 2010; a loss of 25% in nominal dollars, that is without any adjustment for inflation. One has to take into effect the stock market did not go anywhere for 10 years. The good news was that inflation during these 10 year period averaged 2.5% annually. There were some highs and lows…( high of 3.85% in 2008 to a low of -.34% in 2009) but 2.5% is not considered a threat to wealth. However if one adjusts for inflation the “lost decade” becomes even worse. This $1,000 dollars that so many investors had in their mutual funds or index funds was reduced to a nominal $750 at the end of July 2010 now represents only $657 in real terms. Put another way, given the prevailing inflation rate over the past decade, one thousand dollar invested in the S&P on January 1, 2000 needed to grow to $1,343 by July 2010 simply to have preserved purchasing power and produced zero real gains.
What is worse possibly if inflation kicks in. We are seeing huge moves in cotton, the grains, gold, silver, sugar as well as many others. Can you imagine what this does to your purchasing parity. It is very simple… it gets destroyed.
The solution is regardless if there is inflation or even deflation….considering adding to your portfolio an allocation to managed futures. You can add commodity trading advisors to your portfolio. Most Commodity trading advisors trade 80 or more markets including the stock indexes. Your choice….lose purchasing parity….or possibly even make money trading.
Futures trading involves risk. People can and do lose mone