EFF/KRF: Recent Government actions, both fiscal and monetary have created lots of uncertainty about future inflation. Stocks may compensate for inflation in the long-term, but in the short-term they are not very good. And there is so much other uncertainty in stock returns, stocks are not in any case a good specific inflation hedge. TIPS and short-term bonds are good inflation hedges. If you are concerned about inflation risk, you may want to allocate more to them, probably in the tax-sheltered components of client portfolios.
There is a second issue to consider here: the purchasing power of the dollar with respect to other currencies. Investors who are worried about whether the dollar will remain the world's reserve currency, for example, can hedge by investing in foreign securities. Any drop in the value of the dollar relative to other currencies will be offset by higher dollar-denominated returns on foreign investments.
Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to Dimensional Fund Advisors LP.