The Best Investments to Hold When Interest Rates Rise

Inflation can be tough to contend with, yet investors should guard against inflation lest it eat away at their portfolios - which isn't hard to do if they know the best investments to hold when inflation rates rise.

Official interest rates are notoriously unreliable - outright false at times - which can downplay or underestimate the situation. Don't trust the numbers. Make that mistake, and your investments' value can evaporate before your eyes.

On the other hand, overestimating inflation can have negative consequences, too. Overestimating inflation hedges, or any hedge for that matter, can, slowly but surely, eat away at valuable yield.

You need to hedge your portfolio against rising interest rates right now. To do otherwise is to invite slow death for your core holdings.

That's the bad news.

Fortunately, there are several investments and techniques available that can maximize protection while minimizing downside. The anti-inflation arsenal is diverse and full of weapons to suit nearly any investor's risk tolerance, philosophy, and available capital. These constitute some of the very best investments for a rising interest rate environment.

That's the good news.

The U.S. Bureau of Labor and Statistics, using the seasonally adjusted Consumer Price Index, pegged inflation at 2% in July of 2013. But the American Institute for Economic Research has its own "Everyday Price Index," which is not seasonally adjusted and counts more items that most Americans buy on a weekly or monthly basis. In other words, the Institute's EPI is considerably better grounded in reality that the government's CPI.

The Institute has said that "inflationary pressures continue to mount as they have for months," and that "these pressures are coming closer to breaking out into the wider economy." The Institute's EPI has broadly been trending upward for the past three months. The EPI has increased by more than 6% - at an annualized rate.

Even the official number is creeping up, albeit slowly. The U.S. Federal Reserve's massively easy money policy continues to pump money into banks' reserves, which have grown by 48% since mid-May. Interest rates cannot continue to be kept artificially low, no matter how much the Fed tries to pretend the economy isn't growing. It's impossible to pump $2.3 trillion into the money supply and not see some inflation, even if 80% of it is going right into bank reserves.

Whether one uses the fantastical official figure or the real street-level numbers, inflation is going to be a force to reckon with.

Here's what to do about it.

Best Investments for Rising Interest Rates

One of the easiest ways to hedge against inflation and grow your portfolio is to select the best stocks, those with "inflation-proof" earnings." Naturally, these would be companies or even entire sectors that can hold their own in times of inflation. These are often the best investments in any environment.

Retail, specifically discount retailers and those that sell life's little necessities, always tend to hold their own when prices increase. The rationale is obvious: People will flock to discounters in a higher-priced environment in order to stretch their shopping dollar.

Costco Wholesale Corp. (Nasdaq: COST) represents a good value to investors who want to hedge against inflation and grab shares of a company that bucks the unsavory trend of taxpayer subsidized profits. The membership warehouse giant pays $0.31 per share and has an attractive, real EPS of $4.54. And you can sleep easy knowing that Costco pays its employees a fair wage, relieves pressure on the economy - and distinguishes it from some other giant discounters. And, unlike Wal-Mart Stores Inc. (NYSE: WMT), Costco isn't facing a blizzard of growth and PR problems. A stock that can deliver inflation-proof earnings and social responsibility is a must-buy. Even at $116 per share, it's a good value.

Utilities make for another good inflation-proof stock. Prices may go up, but consumers will always buy electricity. Zacks Investment Research has just moved UNS Energy Corp. (NYSE: UNS) to "oversold," suggesting that now is a good time to pick up shares and hold on to them. Zacks reported a Relative Strength Index (RSI) value of 28.17 on these shares. This utility, which owns Tucson Electric Power and UniSource Energy Services, won't stay this cheap for long.

This does not translate to across-the-board gains for energy. Quite the contrary. Some energy concerns, especially master limited partnerships, could be scuttled by inflation or rising interest rates. These companies spend heavily for their growth, and any increase in the price of money spells trouble, even if they have had a really good run.

A Direct Inflation Hedge

Shorting bonds makes for a direct way to hedge against inflation, or a bond market correction, or even a secular bond bear - which we may well be looking at. Inflation degrades bond value, so anything you can do to short bonds in an inflationary environment is good medicine.

To this end, there's always ProShares UltraShort 20+ Year Trea (NYSE Arca: TBT). This exchange-traded fund (ETF) returns twice the daily inverse of the 20+ year Treasury bond. You can pick up shares of this directly and watch it blunt inflation's corrosive attack and deliver a nice return at the same time. It's important that you tend to your TBT shares regularly, with vigilance. This ETF tracks the daily inverse, and any momentary upswings on Treasurys can deliver a hit. The price of inflation protection is eternal vigilance, if you will.

Best Investments: The Gold Standard of Protection

Gold - Is there anything it can't do? It's a fantastic store of value, and, as an investment, it suits a variety of goals and philosophies.

Some people view it as the ultimate hedge, others - perhaps those who are short gold - believe it's less useful as a hedge. Most of the argument against gold as an inflation hedge, that its price no longer tracks inflation closely enough, hinges on those fantasy official inflation figures, which place the arguments on pretty shaky ground. Jim Rogers and I believe it's still a terrific weapon against inflation.

Despite a growing lack of consensus about its relative value as an inflation hedge, it should be a part of any hedging strategy. With so many ways to own this versatile yellow metal, it's never been easier to pick up.

One of the best ways to do so is through SPDR Gold Trust (ETF) (NYSE Arca: GLD). This ETF is one of few that actually owns gold itself, which it keeps in a vault in London. Shares of GLD allow investors to own some physical gold without the hassle of storing it.

A secular bond bear market is definitely on the cards. Click here to find out what Keith Fitz-Gerald wants you to know about it. If you hope to survive the bond bear, you can't miss this report.

What are some of your favorite ways to guard against #inflation during #Bernanke's BBQ? Drop us a line on Twitter, or visit our Facebook page to share tips.

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