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Bernanke Aside, Advisers Shield Against Inflation

Federal Reserve Chairman Ben Bernanke assured Congress today that higher gas prices are likely to push up inflation only temporarily. But investing pros say that could still be enough to end the rally  — and are recommending that clients shield their portfolios.

Stocks may be up 25% from their October 2011 lows, but the threat of oil prices continuing to rise has many investing pros playing defense. Both the rally and recent economic growth could take a hit if gasoline prices take off from current levels, says Scott Wren, senior equity strategist for Wells Fargo Advisors. “That takes money out of pockets and hurts consumer spending,” adds David Kelly, chief market strategist for J.P. Morgan Funds.

These concerns have many advisers scaling back the risk in their portfolios. Many recommend alternative investments such as commodities and real estate to help investors stay on top of higher prices even in the short term.  For example, Frank Armstrong, president of Investor Solutions in Miami, recommends investors put up to 15% of their equity portfolios in real-estate investment trusts, or REITs, which invest in commercial properties such as malls, apartment buildings and office buildings. Because of their higher yields, these vehicles can help investors outpace inflation, says Armstrong.

Investors can also keep pace with inflation with bets on agriculture and industrial metals, which benefit from stronger economic growth in emerging market countries, says Wren. “The focus has turned more on commodities,” says Andres Garcia-Amaya, global market strategist for J.P. Morgan Funds. Armstrong says investors should consider putting up to 7% of their money in commodities funds. Another inflation fighting tool: stocks. Advisers urge clients to stay invested in stocks, and sometimes to incrementally increase their exposure, as the best way to protect their long-term savings from higher costs. But investors should be selective, says Wren, who is overweighting defensive sectors like utilities and telecom and holding less exposure to financial stocks. As the economy picks up, he plans to move more money into aggressive sectors. Armstrong recommends low-cost index exchange traded funds as  way to get broad stock market exposure.

To be sure, prices haven’t risen enough yet to have a meaningful blow on consumer spending, says Wren. And some factors like high unemployment, low demand for credit and low wages, could still keep inflation muted, he adds. And there are other threats to the economy besides inflation. Bernanke, for instance, pointed out that the job market “remains far from normal” and that household spending is still weak. And Fed  officials still expect inflation to remain subdued.

Still, advisers say investors should keep an eye on oil prices as they shape their allocation decisions. And consumer experts warn that other everyday expenses are also on the rise. The American Institute for Economic Research found that day-to-day costs, including food, beverages, utilities, fuel, prescription drugs and other expenses increased by 8% last year.  That compares to a 3.1% increase in the Consumer Price Index, which uses a different mixture of goods and services to calculate the cost of living.

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