How Much Does It Cost To Get A Phone Acreen.Fixed Inflation and the Rising Tide – Protecting Your Assets From the Storm

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Inflation and the Rising Tide – Protecting Your Assets From the Storm

There’s an old expression: A rising tide lifts all boats. A rising tide can also inundate them. And with signs of an improving economy on the horizon, there is a real possibility that inflation will come flooding in. Why worry about inflation? Well, inflation is an investor’s worst nightmare. For people of retirement age living on a fixed income, this can wipe out their savings and lifestyle. As a bond or CD holder, the purchasing power of regular interest income takes a hit. As a stock investor, stock prices can suffer as profit margins and profits on your equity holdings are affected by higher costs of raw materials such as energy, precious metals and labor.

Wall Street is in a good mood right now. For the quarter just ended, the Dow is up about 14%, the S&P is up 14.5% and the NASDAQ is up 15%. In fact, the last time the Dow saw such a big quarterly jump was in the fourth quarter of 1998, when it rose more than 17% while the dot-com bubble was forming. The rally this quarter continued a trajectory that began in mid-March 2009. It was primarily driven by flashes of light at the end of the tunnel. A variety of positive statements from Federal Reserve Chairman Ben Bernanke contributed to the more optimistic outlook. Home sales continued to rebound, driven mostly by a tax credit for first-time home buyers. Corporate profits are up.

The popular “cash for rattles” program boosted auto sales, and by some measures, consumer spending increased marginally even without the impact of auto sales. Despite Wall Street’s rally, Main Street is still suffering: unemployment continues to rise, business and personal bankruptcies are up, bank failures are at an all-time high and the dollar continues to weaken, fueling fears of inflation along the way. The signs of higher inflation ahead are on the radar screen: all the government economic stimulus here and abroad combined with rising public debt; the Fed’s projected end of a program in March 2010, which will likely lead to higher mortgage rates; a Fed interest rate policy that has nowhere to go but higher, and rumblings that foreign governments and investors may not want to continue at their current pace of maintaining our debt. So how do you position yourself to win regardless of which way the tide turns?

Now, more than ever, it is it is important to have a risk-controlled approach to investing.

This is centered on an age-based allocation that includes exposure to multiple assets. That’s why we’ll continue to manage portfolios with an allocation to bonds and fixed income, but there are ways to hedge against the impact of inflation and still allow for growth.

1.) Include dividend paying stocks: Using either mutual funds or ETFs that target dividend-paying stocks will help increase income as well as returns. Dividend-paying stocks average nearly 10% annualized returns, compared to total returns less than half that of stocks that rely solely on capital appreciation. Better yet, consider stock mutual funds or ETFs that focus on stocks that have a track record of growing dividends

2.) Keep it brief: By owning bonds, ETFs or bond mutual funds that have shorter average maturities, you reduce the risk of being locked into less valuable bonds when higher inflation raises future interest rates.

3.) Hedge your bets with inflation-linked bonds: Fixed rate bonds offer no protection against inflation. A bond that has changes linked to an index of inflation (such as the consumer price index), such as TIPS issued by the US government, or an ETF that owns TIPS (such as the iShares TIPS Bond ETF – symbol TIP) offers an investor the opportunity to bonds to periodically compensate for higher inflation.

4.) Sail your boat with floating speed notes: These medium-term notes are issued by corporations and reset their interest rates every three or six months. So if inflation heats up, the interest rate offered is likely to increase. The yield is generally higher than that offered by government bonds, usually because of the higher credit risk of the issuer.

5.) Adding junk to the trunk: High-yield bonds are issued by companies that have experienced downgrades — sort of like homeowners with poor credit who get a mortgage. The yield is set higher than most other bonds because of the higher risk. Still, as inflation heats up with a growing economy, the outlook for junk-issuing firms improves and the perceived risk of default may decrease. As the yield gap narrows between these “junk” bonds and Treasuries, these bonds offer “pop” to investors.

6.) Own gold and other goods: Whether as a store of value or a hedge against inflation, precious metals have a long history with investors seeking protection from inflation. It is usually best to focus on owning physical gold or an ETF that is linked directly to physical gold. The tax treatment of precious metals is higher due to their “collectible” status, but this is a small price to pay for some protection from inflation. And since demand for commodities generally increases with a growing economy or a weakening dollar (in the case of oil), owning funds that hold these commodities will help hedge against the inflationary impact of a growing economy.

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