Diversify to Fight Inflation

The argument over inflation has reached fever pitch as investors turn to gold, TIPS and index funds to diversify their portfolios and beat the specter of declining purchasing power. However, if inflation fears are not realized, these three investments still serve as good ways to diversify your portfolio in a difficult economic climate.

Gold has historically been one of the investments of choice for people seeking to hedge against the loss of the purchasing power of paper currency. Shares of iShares COMEX Gold Trust(IAU Quote) and SPDR Gold Shares(GLD Quote) represent a direct investment in the price of physical gold bullion, stored in protected locations. These funds do not invest in equity securities or complicated derivatives -- just the real deal. An investment in IAU or GLD also allows investors to take a stake in physical gold without state of the art security and a giant vault.

Gold prices can be very difficult to predict and many wise traders have chased the gold trade only to buy at the top and sell at the bottom. Investors should choose GLD or IAU as a long-term inflation hedge, not a short-term gamble. If you believe that inflation concerns are unfounded, gold is a good way to diversify your portfolio with an investment that has traditionally performed well when other sectors of the market have done poorly.

Treasury inflation-protected securities are another popular way to steel a portfolio against inflation and iShares Barclays TIPS Bond Fund(TIP Quote) provides a consumer-friendly method for investors to buy TIPS. While the consumer price index is not perfect, it serves as a guide for consumers and the principal investments in this fund.