How do we combat inflation?

[maddog21]

Now that the fed has admitted that they are seeking to inflate our currency how do we protect our savings from losing value? It really is unbelievable how we didn't see this coming. So now what can we do about it? Gold, Stocks, Bonds, Real Estate??

[jIM_Ohio]

TIPs and Ibonds for anything which needs to be close to cash and conservative

Growth stocks for money which is long term

and maybe a little hedge in commodities for mid term and long term monies.

[KTP]

Now that the fed has admitted that they are seeking to inflate our currency how do we protect our savings from losing value? It really is unbelievable how we didn't see this coming. So now what can we do about it? Gold, Stocks, Bonds, Real Estate??

I wouldn't go too much into gold...it is really getting up there in price...bubble alert. Real estate is also messy because of taxes (a $100K property taxed at 2% is like buying a mutual fund with a 2% management fee....pretty outrageous).

Bonds would be about the worst thing to buy to protect against inflation, as they drop like a rock when the rates go up (this can seem confusing at first, but it stems from the fact that if you are holding a 5 year bond paying 3%, and inflation-rate-increase means someone could buy a new 5 year bond paying 4%, then your bond is worth less...and a lot less than just the 1%.)

So that leaves stocks. I think having 20% to 30% in international stocks is about the best you can do to protect against inflation. Having some domestic stocks that have international exposure could help also. There are also treasuries called TIPs that will work somewhat to your favor during inflationary times.

[maddog21]

Which international stocks do you like? I was told the same thing about gold when I wanted to buy it at 900. I agree that it is expensive but the weaker the dollar the more it continues to rise. What exactly is a TIP and how/where do I invest in it?

[KTP]

Which international stocks do you like? I was told the same thing about gold when I wanted to buy it at 900. I agree that it is expensive but the weaker the dollar the more it continues to rise. What exactly is a TIP and how/where do I invest in it?

Great, so you could have bought gold at $900...you could have bought Apple at $25 a few years back also.

I invested in a Vanguard international mutual fund (i forget which one...VGIITX or something like that) through my roth and ira accounts because my 401K didn't have a good fund available for that. I didn't want to put the international fund in my taxable investments because there is the possibility of huge growth (and huge taxes).

You could buy a little gold...maybe 5% or so, if you like the luster, but I don't think gold is going to be the path to easy retirement for a lot of investors.

[maddog21]

Haha. The funny thing is I bought apple at 80 and sold it at 85. Hind sight!! oh well

I agree I am not going for gold either but it sure is shiny I am going to see what is available in my 401k. I don't have an IRA since I have a 401k but is there a benefit to having both?

[Broken Arrow]

I know it's a bit abstract and controversial, but inflation isn't inherently evil. Yes, we are losing buying power for the money that we earn, but at the same time, it also makes goods and services "cheaper" to buy. And seeing as how America in general is a consumer economy, that's why the Fed has been battling the deflationary condition throughout this recession.

In fact, trying to lower the market value of a nation's own currency is actually the de jour economic policy right now. Just look at China, and how hard they are attempting to keep their own Yuan down. Some speculate of an international currency war.

Nevertheless, it's not a bad idea to hedge against inflation in our investments. All of the above will work to some degree, but an I-bond/TIPS fund will give you the most direct protection. The easiest thing to do is to just set aside a % of your money in your portfolio to such a fund and you're good to go.

Arbitrarily, I wouldn't recommend more than 25% of your total portfolio into such a fund though. Some people go way overboard, and they actually end up hurting themselves from over-investing into a certain asset class.

[maddog21]

I have to disagree with one of your points Arrow about goods and services being cheaper. Inflation means that the prices of goods and service go up while the nominal value of the dollar falls. This makes good and services more expensive in the short term since salary and wage increases always lag behind the consumer price indexes.

I agree that the governments are all trying to inflate their currencies and that is because they would like to decrease the value of their debts and increase their exports. China of course wants to keep their exports high as well.

This definitely reeks of possible trade wars. Hopefully the governments around the world will not be so stupid.

[Broken Arrow]

I have to disagree with one of your points Arrow about goods and services being cheaper. Inflation means that the prices of goods and service go up while the nominal value of the dollar falls. This makes good and services more expensive in the short term since salary and wage increases always lag behind the consumer price indexes.

Yeah, you are right. Sorry about that.

[maddog21]

No need to apologize! I really appreciate your insights.

[Snodog]

Last time we had serious inflation small caps and gold did well. Tips are probably good to have but they have been untested.

I'm not really that worried about serious inflation though as we have huge deflationary forces acting on our economy. I hope I'm wrong. But I invest as though I don't know whats coming(inflation/deflation/prosperity).

The key is to be properly diversified because ANYTHING is possible while keeping in mind that you can't protect against a worst case scenario.

[littleroc02us]

My advice: Quit trying to beat the market, it's to risky. Buy mutual funds and Reit's and hold for a long time, don't touch it and do your research to make sure your in the right Roth Ira's. Look at the 10 year track record.

[littleroc02us]

As far as Gold goes, just look at it's history of return @ Gold Price History. Why would you buy something that is at it's all time high? Now is the time to sell Gold, that is it. Buy low, sell high. Simple logic.

[Cassius King]

Another thing to think about when wanting to invest in gold. I remember Warren Buffett stating that it's a poor investment because it yields no cash. No interest nor dividends. It's dead money until you can find a buyer. The only gains to be made our on selling for more than you bought it for. Gold is a highly inflated bubble right now. Don't be the last person in the room.

[jIM_Ohio]

Holding commodities with inflation rising is a good idea. Real estate, gold and oil are all commodities.

If you believe you need to own something for diversification, there is never a bad time to buy.

If you only want to own something because it goes up in value, probably not the best time to buy gold, but as a gold owner myself, I am not selling anytime soon.

Here is an analogy to consider.

If you are an asset allocation purist, and have an allocation of 80% equities and 20% bonds, then you decide this is not correct because it takes on too much risk and does not have enough diversification. So you come up with a new allocation of 40% equities, 40% bonds and 20% other to make sure you are diversified.

Do you wait for equities to go up to make that move (so your move from 80% equities to 40% equities has a HUGE profit, or do you just make the move the day after you decide to lower your risk and increase your diversification?

If the items you put the 20% other into (such as 10% real estate, 5% gold and 5% silver) are each in bubbles then you are selling high (equities) and buying high (other) but overall you have less risk in whole portfolio.