Investment During Deflationary vs. Inflation Periods

One of the (few) benefits of studying for the CFA Level I exam is that I can follow WSJ articles like this (subscription may be required). It discusses types of investments you should consider depending in inflationary vs. deflationary environments. I'll summarize the recommendations here:

Deflation:

• GOOD INVESTMENTS
  • Zero-coupon bonds: interest goes down, price goes up. However, you'll have to pay annual income taxes on interest even though you're not being paid a cash coupon.
  • Foreign bonds: USD weakens in deflationary periods.
• POOR INVESTMENTS
  • Corporate bonds: consumers will defer purchases to wait for lower prices putting pressure on a company's sales/earnings, thus increasing the probability of a default.
  • Real estate: prices will drop. End of story.

Inflation:

• GOOD INVESTMENTS
  • Hard assets, e.g., real estate, gold.
  • TIPS (Treasury Inflation Protected Securities): the name says it all
• POOR INVESTMENTS
  • Bonds: price is inversely related to interest rates.