In case you are wondering, "D" is my husband -- Dave Liu! As you've probably noticed, I don't update this blog often but I may post more as I've linked this to my Google+ account.

Friday, June 06, 2003

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.

No comments: