Going against the herd can turn bad times good again.
Stagnation plus inflation equals a world of pain for investors. Nobody wants to see her investment portfolio growing slowly, if it's growing at all, while rampant inflation makes hard-earned dollars worth less and less. Unfortunately, the current forecast calls for a little bit of both right now, so you may want to make some changes in your investment strategy.
What's stagflation all about?
During a period of stagflation, you'll find inflation combined with stagnation (slow economic growth). Companies cut costs more than they prepare for growth, and consumers make things worse by saving rather than spending their precious cash. This combination usually leads to higher unemployment, bad stock market returns, and runaway price inflation on the things you buy and use every day.
Rising oil prices and a widespread crisis in the housing market have come together to form dark storm clouds right now, and it's only a matter of time before we have to deal with a possible hard rain that might fall.
Many financial pundits say that you should stay away from the stock market during stagflationary times. If you're an investor with a short-time horizon, it may make sense to move your money into commodities such as oil and precious metals, because they're rising in value. However, investors with a long-term horizon should ride out this period until good days return again.
On the other hand, you don't want to buy gold or oil-based trading instruments like exchange-traded commodity funds or option contracts when everybody else is doing the very same thing. A gold rush like that is sure to drive up prices beyond their rightful levels in very short order. At the end of the 1970s-the last major stagflation period-gold prices hit a peak of about $2,100 per ounce in inflation-adjusted prices before falling back to the $700 range in the early 1980s. Don't get caught buying into that hype.
Time to buy!
There's little doubt that the stock market, in general, will suffer if and when we go into full-tilt stagflation mode. Owning a portfolio of domestic stocks, mutual funds, and corporate bonds may hurt for a while.
It's not all bad news, though, because it can be a great time to buy. Everyone else may be selling in a panic, so a levelheaded investor can find great bargains in times of trouble. Assuming that you aren't one of the hordes of newly unemployed-and if you are, let's hope that you have a decent emergency stash built up-that crash would be the best time to buy more of the investments you love today.
Let the other lemmings careen off a cliff while you're building a better retirement savings portfolio. The market has always bounced back, so you might as well take advantage of the dips and slips along the way.