How Should I diversify my 401k?

[Hosakawa Tito]

The Fed is printing even more money to satisfy Washington's runaway spending in the hopes of proping up our failing economy. The end result will be a rise in inflation and devaluation of the dollar. During periods of rapid inflation your money is literally worth more today than it will be tomorrow. So “spend” it. Whether that means buying a car now instead of next year or investing in the stock market depends on your personal situation. But sitting on cash will cost you in the long run.

Hosa's inflation hedge:

1. Buy TIPS, Treasury Inflation-Protected Securities. Unlike conventional Treasurys, these bonds see their value adjust with inflation to ensure you don’t get eaten up as the dollar fades.If you have any doubt whether or not TIPS work or how bullish Wall Street is on this vehicle, consider that in October the U.S. Treasury successfully executed its first-ever TIPS auction in which the bonds actually had negative yields. That’s because the specter of inflation is so likely that investors were willing to enter the investment in the red with the expectation of rising yield over the life of the investment that makes a short-term loss well worth it.

2. Buy gold. Even though it's had a significant run up in price this year on the expectation that inflation will rise, when it does gold could soar much higher. Don't be tempted by mining companies though. I'd recommend a reputable dealer or a gold ETF like GLD. Gold is a speculative asset. It looks attractive but is high risk at this price. If the economy stabilizes and high inflation doesn't materialize, gold could drop significantly. You're betting on a specific scenario for the US economy, double digit inflation.

3. Invest in crude oil ETF's like OIL. Crude oil is priced in U.S. dollars. As a result, when the dollar drops in value, it takes more dollars to buy the same amount of oil. That means oil prices rise in an inflationary environment, as do profits in the crude oil sector.

There are ETF's that bet against the dollar and you can also play exchange rates between the dollar and other currencies, but I'm not sophisticated enough in that stuff to even think about trying it.