Stocks of companies that produce commodities can be nearly as volatile as the commodities themselves. Mutual funds that hold natural-resource stocks soared 21.5% on average in the second quarter, compared with 16.8% for the average domestic stock fund.
To minimize the risk from investing in a single commodity, many investment advisors suggest commodity index funds, which are designed to track a particular index of commodities.
Stocks can be good investments in times of rising prices. That's because inflation allows many companies to raise their prices, boosting their earnings -- and their share prices.
"Keep a good portion of your long-term money in equities, because they will always outpace inflation," Bordwell said.
But some sectors, such as energy and healthcare, can raise prices more easily than others, said James Dunigan, managing executive at PNC Financial Services Group Inc.'s wealth-management unit in Pittsburgh. So those sectors could benefit
Another way to play inflation is to invest in companies that ship goods abroad. The reasoning: If inflation in this country is greater than inflation in other major economies, that could push down the value of the dollar against other currencies. That helps U.S. exporters in two ways: Their goods become relative bargains abroad, and the value of their foreign sales in dollar terms increases.
One of the most important things to understand about periods of steep inflation is that they have beginnings and ends. If you turn your portfolio into one big inflation hedge, you're bound to lose out after prices start to level off.
With that in mind, Dunigan advises devoting no more than 10% or 15% of your holdings to inflation-resistant investments.
"If inflation is coming, hedge against it," he said, "but don't rip your portfolio apart."
(BEGIN TEXT OF INFOBOX)
Mutual Fund Quarterly Report
The value of long-term U.S. government bonds plunged for a second straight quarter as more investors felt confident enough about the financial system and the overall economy to move money back into riskier bonds and stocks.
Property funds surged 30.2% in the second quarter on hope for a timely end to the recession. But the sector is down sharply over the last three years. And many analysts say the worst for commercial real estate is still to come.
Global stock markets soared, often surpassing Wall Street. Emerging markets did especially well. In some markets, stronger local currencies made returns in dollar terms even higher. Brazil's market returned 48% for U.S. investors.
The revival of optimism and risk-taking that caused a powerful rally in stocks also sent the market value of corporate bonds up sharply, especially lower-rated "junk" debt. Funds holding higher-rated, long-term issues returned 10.9%.
Funds specializing in shares of tech companies gained 20.7% in the second quarter as investors figured such firms would benefit disproportionately from a rebound in the global economy. Telecom funds returned 23.5%.
So-called short-selling portfolios, which tend to move in the opposite direction of the overall stock market, recorded the worst performance among all stock-fund categories, plunging 20.2% in the quarter.