There is an old saying Rising tides lift all boats. Rising tides can overwhelm them. If signs of improvement in the economy are visible in the future it is possible that there will be a possibility that inflation will rise as the tide rises. Why should we be worried about inflation? In fact, inflation is the worst nightmare of investors. For retirees with fixed incomes, the impact of inflation can be devastating to the savings of one’s lifestyle and financial security. If you are a CD or bondholder your purchasing power from regular interest income can be harmed. If you are a stock investor the prices of stocks could be affected because profit margins and income from your equity investments are impacted by the increased prices for inputs such as the energy sector, precious metals, and labor.
In the present, Wall Street is in an upbeat mood. In the last quarter, it was reported that the Dow is up by around 14%, while the S&P has risen 14.5 percent, and the NASDAQ increased by 15 percent. In reality, the most recent time that the Dow experienced such a massive increase in the quarter was 1999’s fourth quarter, when it climbed over 17% in the midst of the dot-com bubble was beginning to form. The rally this quarter started around mid-March 2009. It was driven primarily by the glimmering of hope at the end of the tunnel. Numerous positive comments made by Federal Reserve Chairman Ben Bernanke have led to a more positive perspective. Residential real estate sales have continued to rise, mostly prompted by a tax incentive for first-time buyers. credit. The earnings of corporations have increased.
The well-known “cash for clunkers” program increased sales of cars and, by some measures, consumers’ spending increased slightly with no impact from automobile sales. In spite of the Wall Street rally, Main Street continues to be in a state of distress the most: unemployment is still rising as personal and business bankruptcy cases have increased, the number of bankruptcies is at its highest point and the dollar is still weakening increasing the risk of inflation coming in the near future. Indicators of higher inflation in the future are being watched and include all the federal economic stimulus in the United States and elsewhere and the growing national debt. The Fed’s predicted ending of the program in March of 2010 is likely to result in increased mortgage rates; a Fed rates policy that isn’t going anywhere other than up, and rumblings that foreign investors and governments may not want to go on in the current manner of sustaining our debt habits. How do you make sure that you are profitable whatever the outcome?
More than ever before, it’s crucial to take a method of investing that is risk-free.
This is in the form of an age-based allocation, which includes exposure to a variety of assets. This is the reason why we continue to manage portfolios using an allocation to fixed and bonds. income. However, there are methods to shield ourselves from the effects of inflation, while still allowing growth.
1.) Include dividend-paying equity using ETFs or mutual funds with a concentration on dividend-paying stocks can aid in boosting the amount of income and also increase return. Dividend-paying stocks have an average of around 10% return per year compared to a return of less than half for stocks that depend solely on capital appreciation. Consider ETFs or mutual funds which focus on stocks with an impressive track record of increasing dividends.
2.) Be short-sighted: By purchasing bonds ETFs, bonds, or other funds with an average maturity shorter than the norm and lower the chance of being stuck in bonds that are less valuable as inflation rises and pushes interest rates higher.
3.) Put your money into inflation-linked bonds: Fixed-rate bonds do not offer protection against inflation. Bonds that have changes tied to an index of inflation (like that of the Consumer Price Index) like TIPS issued by the US government or ETFs with TIPS (like iShares TIPS Bond ETF with symbol TIP) can provide an opportunity for investors in bonds to receive periodic compensation for inflation that is higher.
4.) You can float your boat using floating-rate notes: These medium-term notes are offered by companies and they reset their interest rates every three to six months. In the event that inflation rises the interest rate that is offered is likely to increase. In general, yields are greater than those of the government bond market, mainly due to the greater risk of credit for the issuer.
5.) Add junk to the trunk Bonds with high yields are issued by companies that have experienced downgrades, similar to homeowners with damaged credit who are seeking mortgages. The yields are higher than the majority of bonds because they are riskier. But, as inflation rises up due to the growing economy, the opportunities for companies that issue junk increase, and the risk of default could decrease. As the yield gap diminishes between “junk” bonds and Treasuries These bonds provide the prospect of a “pop” to investors.
6.) Have Gold and Other Commodities: As a source of value or to hedge against inflation precious metals have a longstanding relationship with investors who seek protection against inflation. It’s generally better to concentrate on owning actual gold, or an ETF tied directly to physical gold. The tax treatment for precious metals is more favorable because of their status as a “collectible” but this is not a significant cost to pay to get some inflation protection. In addition, there is demand for commodities that generally grows with the growth of an economy or the weakening of the dollar (in the particular case of oil) having funds that contain these commodities can help protect against the effects of inflation in an expanding economy.