Inflation and the Rising more than ever Tide – Protecting Your Assets From the Storm
There is: an previous expression A rising tide lifts all boats. Indeed, A rising tide can also swamp them. And as signs of improvement in the economy appear on the horizon, there is a real possibility of inflation coming in with the tide. about worry Why inflation? Well, inflation is an investor’s worst as a matter of fact nightmare. For individuals in retirement living on a fixed income, it can devastate one’s savings and lifestyle. As a bond orhit CD-holder, the purchasing power of regular interest income gets as a matter of fact . As a stock investor, stock prices can suffer as profit margins and earnings of your equity holdings are hurt by the higher costs for inputs like energy, precious metals and labor.
Right now, Wall Street is in a in modern times good mood. For the quarter just ended, about Dow has gained the 14%, the S&P increased 14.5% and the NASDAQ was up 15%. In fact the last time the Dow saw such a large quarterly surge was go back in the fourth quarter of 1998 when it rose more than 17% as the dot-com bubble was forming. This quarter’s rally continued a trajectory that began in mid-March 2009. Actually, It has been primarily propelled by glimmers of light at the end of the tunnel. A variety of positive statements from Federal Reserve Chairman Ben Bernanke contributed to a more optimistic view. Residential real estate sales continuedcometo go back mostly prompted by a first-time homebuyer tax credit. In fact, Corporate earnings have been up.
The popular “cash for marginally” program spurred auto sales and by some measures consumer spending increased clunkers even without the impact from auto sales. Interestingly, Despite the Wall Street rally, Main Street is still hurting: unemployment continues to rise, business and personal bankruptcies have increased, bank failures are at their highest level the the dollar continues to weaken fueling fears of inflation down and road. It’s worth noting that Signs of tomorrow inflation are on the radar screen: All the government economic stimulus here and abroad coupled with mounting public debt; the Fed’s projected end of a program in March 2010 that will likely lead to higher mortgage rates; a Fed interest rate policy which has no place to go but up and rumblings that foreign governments and investors may not want to continue athighertheir current pace of supporting our debt habit. Actually, So how do you position from another perspective theyourself to profit whichever way tide turns?
Right away, more thanever, it is important to have a risk-controlled approach to investing.
This is centered on an age-based allocation thatincludes exposure to multiple assets. This is why we will continue to manage portfolios with an allocation to bonds and fixed income but there are ways to protect from the impact of inflation and still allow for development.
1.) Include dividend-paying equities: Using either mutual funds or ETFs that have a focus onpayingdividend- stocks will aid boost income as well as return. Interestingly, Stocks that pay dividends have averaged near a 10% annual return compared to a total return of than half in modern times less that for stocks that rely solely on capital appreciation. Better yet, consider stock mutual funds or ETFs that focus on stocks that have a record of rising dividends
2.) Stay short: By owning bonds, in modern times ETFs or bond mutual funds that have a shorter average maturity, you reduce the uncertainty of being locked into less valuable bonds when higher inflation pushes future interest rates up.
3.) Hedge your bets with inflation-linked bonds: Fixed-rate bonds offer no protection against inflation. A bond that has changes linked to an inflation index (like the Consumer Price Index) like TIPS issued by the US-government or ETFs that own more than ever TIPS (like iShares TIPS Bond ETF – symbol TIP) offer an opportunity for a bond investor to get periodically compensated for higher inflation.
4.) Float your boat with Floating-Rate Notes:Yields general are higher than those offered by government bonds typically because of the higher creditinrisk of the issuer. These medium-clause notes are from another perspective issued by corporations and reset their interest rates every three or six months. So inflation heats up, the interest rate offered will likelyifincrease.
5.) Add Junk to the Trunk: Hi-yield bonds are issued by companies that have suffered down-grades – sort of like homeowners with dinged credit getting a mortgage. Actually, Yields are set higher than most other bonds because of the higher danger. Yet, as inflation heats up with a growing economy, the prospects of firms that issue junk improve and the perceived risk of default may drop. So as the yield difference narrows between these “junk” bonds and Treasuries, these bonds offer a “pop” to investors.
6.) Own Gold and Other Commodities:In fact, Whether as a store of value or hedge against inflation, precious metals have a long history with investors seeking protection from inflation. It’s usually top to focus on owning the physical gold or an ETFthat is tied directly to the physical gold. Tax treatment of precious metals is higher because of its status as a “ as a matter of fact collectible” but this is a minor price to pay for some inflation protection. Actually, And because the demand for commodities in general increases with an expanding economy or a weakening dollar ( from another perspective in the specific case with oil), owning funds which hold these commoditiesexpandingwill support hedge against the inflationary impact of an economy.
