If you are in the camp that thinks that all this government spending and a resurgent global growth (after this recession is over) will cause an above average inflation scenario, and want an investment strategy that could help in such a scenario, then read on.

There are several ways one can hedge against inflation. One can invest in commodities, gold, oil, and the more traditional US TIPS. However, each comes with its own flavor of risk and a variety of factors that can cause the returns of the strategy to differ from just “Breakeven inflation” (term used interchangeably with “inflation expectations”).

So I was looking at my portfolio the other day, as I aim to do for the annual rebalancing act, when it struck me that I had a large medley of funds that I collected over the years of chasing performance. Well thought out rational exuberance, I mused. However what this led to was about 20 odd funds in the portfolio, with no coherent investment strategy, and possibly a lot of overlap among the funds. Time for a change.

My strategy for the recent past has been to invest a large part of my portfolio in a broadly diversified ETFs such as iShares MSCI EAFE Index Fund (EFA). I am talking about geographical diversification as opposed to sector or asset class diversification. This base provides my “beta” return. On top of this, I make selected bets in several countries via country specific funds, to seek “alpha” (no pun intended). Left unbalanced, some of these alpha funds have ballooned to occupy quite risky percentages of my portfolio.

Before you dismiss this idea as an absurd, attention grabbing headline (it is), allow me to present a few facts and assumptions, and the objective of this story. I assure you that by the end of it you will agree with me, statistically speaking.

First, the objective of this exercise: to focus you to think long term and realize the power of compounding. Nothing new here, but when you do a few extrapolations, the numbers may amaze your perspective.