Just as a farmer can hedge against changing crop prices, you and I can hedge against forces beyond our control; things like gas prices, interest rates, food expenses, and the housing market for instance. While many people assume such a role by default, we don’t have to be a victim to volatile changes in macroeconomic variables such as these. Here are a few ways you can effectively shield yourself (and potentially even profit) while everyone else is griping and complaining:
Energy Prices:
Remember how much press skyrocketing energy prices were getting last summer? It would be pretty naïve to doubt that we could see prices like that again in the near future; just wait until the global economy comes roaring back to life. That said, there’s absolutely no reason why we should simply wait for it to hit. In fact, now is the perfect time to set up hedges against this imminent happening.
We can conserve and cut back to an extent, but we all still feel the effects of rising energy prices on our finances. The extremely easy, yet effective, way to build a hedge is to invest in energy companies who directly benefit from higher prices. No time or skill to hand-pick a couple of strong investments? No biggie- just go with an ETF. With a single transaction, you get instant diversification among hundreds of energy companies. My weapon of choice is Vanguard Energy (VDE), although there are plenty of similar funds to choose from. When oil blows past $100 again, the higher cost of filling up the ride and powering your home will be offset by the gains realized through these energy holdings.
Food Prices:
Obviously we cannot stop eating, so we’re largely powerless to avoid rising food prices. However, there are some options here as well.
You could always try your hand in the futures market, but unless you have significant trading experience under your belt, you’ll likely be supplying the big players in the game with their consistent supply of newbie’s capital.
Just like the energy market, there are funds offering exposure to the agricultural commodities market for even the smallest of investors. This article lists some of the options. With a small investment, you can be in a conservative position to profit from rising agricultural prices.
There are also individual companies who stand to benefit from continued tightening of world food supplies. The Monsanto’s of the world have plenty of haters, but they are definitely here to stay. They’ll have a prosperous future as we must continue to feed more and more mouths with a fixed supply of land.
House Prices:
If you have recently had the opportunity to acquire a home during this incredible buying market (Joe), congrats. For many of us though, we aren’t currently in a position where we can directly invest in a house for ourselves. I’m probably 3-5 years away from seriously considering home ownership, and by that time prices will have rebounded sharply and mortgage rates will likely be far higher than they are now. This doesn’t automatically mean that people like me must miss this once-in-a-lifetime buyer’s market altogether though.
Once again, we can turn to recent financial innovations to obtain exposure to the broad housing market. Like the energy and food sectors, there are ETFs available that track the real estate market (IYR is one). As for individual companies, Lowe’s and Home Depot offer some rebound potential that should coincide with that of the housing market.
These ideas are by no means exhaustive; there are a million ways to take action. The point is that we are not completely at the mercy of what the economy does. You can either sit around and take whatever is dished up, or be proactive and take the reins. I’ll choose the latter.
This probably makes for a good time to link to my disclaimer.
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