Investment Guy

Inflation is a silent killer of wealth.  2009 saw an enormous increase in the money supply, as well as a massive expansion of US government debt.  This combination is a recipe for inflation, and there are few economic forces as damaging to your wealth as inflation. 

There is no silver bullet to protect your portfolio, but here are 7 investments we believe can  help prepare your portfolio for an inflationary world:

1)      Commodities/ Hard Assets:  Hard assets such as metals and foods should maintain their value relative to today’s prices.  How to invest:

1. Mining/Agriculture stocks
2. Gold bars and jewelry

2)      Energy: Oil and Gas are commodities, so it goes without saying that these assets should rise in value.  How to invest:

1. Energy stocks
2. Numerous oil/gas investments

3)      Real Estate:  There are two components to real estate that have benefitted from inflation: The value of debt diminishes: mortgage payments are fixed and therefore decrease relative to the dollar, and the value of property (hard asset) increases.  How to invest:

1. Rental property

4)      Inflation Protected Securities: Transfer Risk of inflation to governments, investment banks, or insurance companies.  How to invest:

1. US Government: Treasury Inflation Protected Securities (TIPS).  Remember, Government bonds or U.S. Treasury Bills do not eliminate market risk.)
2. Insurance company: Annuity with COLA (Cost Of Living Adjustment)

5)      Bonds- interest rates have risen in inflationary environment.   Remember, the purchase of bonds is subject to availability and market conditions.  There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa.  Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income How to invest:

1. Floating rate bonds: These are bonds with variable rates.  As rates increase, so will the interest payments. 
2. Step-up bonds: Bonds that have a pre-defined schedule of interest rate increases over the life of the bond, regardless of interest rates today.  Be aware of call features that could redeem these bonds early.

6)      Currencies.  How to invest:

1. There are a number of investment products that track the relationship between the dollar and another currency (i.e. Euro, Yen).  If you believe the dollar is going to get stronger or weaker based on an inflationary environment this may be your easiest way to invest in currency.

7)      Equities.  How to invest:

1. US Stocks- Historically, stocks have done well in an inflationary environment relative to bonds.  Stick with companies that have global businesses.

Past performance is no guarantee for future results.

USE THIS CHART to navigate the roller coaster of investing

Buy Low, Sell high.  That’s the one maxim that every investor knows, but for some reason most people ignore it.   It seems that something always gets in the way: Emotions. 

My most conservative clients are always eager to get more exposure to stocks when the Dow is flying high, and I got more requests to sell in January and February as the market was bottoming than anytime in my career.  Why does this happen? 

Logic and emotions have never been a perfect pairing. We all know it is logical to stay focused on your long term goals during periods of market volatility, but emotionally it becomes very difficult to follow this reasoning. Emotional instincts tend to contradict sound investment decisions.

 If you make investment decisions based on emotion, you may regret that decision in the long run.  This could be selling out your 401(k) after a 40% selloff only to sit on the sidelines watching as the market is up 30% in the next month. **these are hypothetical numbers**

 Making wholesale changes to your 401k plan forces you to time the market.  You need to be correct not only with selling your investments, but again when it’s time to buy back into the market.  The results could be disastrous to your portfolio.

 This chart is a great way to put your emotions in perspective and take a logical approach at decision making.  Next time you want to make an investment decision based on emotion, look at this chart, and ask yourself: WHERE ARE WE NOW?