The best investment to protect your portfolio from inflation is precious metals. In particular, gold is the best as far as stability and reliability. The reason there is price inflation is generally because of an increase in the supply of money. When a government’s central bank controls the money supply, it can increase (or decrease) the supply of money almost at will. When there are more dollars chasing the same number of goods, prices naturally rise.
Precious metals like gold and silver do very well in an inflationary period. This can be seen by looking at their performance in the 1970’s. Just having the fear of inflation or a weak dollar can drive the price of gold up dramatically. This can protect your portfolio from inflation and even provide some additional profit. Of course, gold and silver can also do poorly in other economic environments like recession or prosperity.
Although you can buy precious metal mutual funds, these tend to be much less stable than the actual metals. The swings can be more dramatic and you are subjecting yourself to companies that own and mine gold. Therefore, you have to worry about the fundamentals of the companies that are in the mutual fund.
If you are looking for a good overall fund that will protect your money in any economic environment, I would recommend the Permanent Portfolio Fund (symbol: prpfx). It invests approximately 25% in gold and silver and is well diversified in other areas like stocks, bonds, and short term treasury bills. The fund has an excellent and consistent performance. There are very few years it goes down and it is mild when it does. In addition, it will perform very well in an inflationary period. I would encourage everyone to get this fund or set up your own portfolio in a similar fashion.