Keep inflation in mind when investing
Jon Geitz, Special to The Gazette
Monday, August 24, 2009
As an investor, you’re no doubt aware of the potential effects of market volatility on your portfolio. But you also need to pay attention to another factor that could impact your investments’ return: inflation.
If you look back over the last few decades, you might not think inflation is much of a threat. Since the double-digit rates of the early 1980s, inflation has fallen significantly and, for the most part, has stayed low. Still, over time even a mild annual inflation rate can eventually erode your purchasing power.
Obviously, if you are a retiree or close to retiring, you need to plan for the impact of inflation on your income stream, which may, to a large degree, depend on the types of investments you own. But even if you’re at an earlier stage in life, you need to think about inflation because it can reduce the “real” rate of return you receive on your investments.
You can, however, find investments that may be able to help you cope with inflation. With stocks, for example, you can have an ownership stake in companies that have the ability to raise prices — which makes them effective inflation-fighting investments. Keep in mind, though, that stock prices will fluctuate, and there’s no guarantee you won’t lose some, or all, of your principal.
One of the biggest inflation-fighting benefits of stocks is the dividends they may pay. Well-run companies may reward investors by paying them dividends — and some companies have increased their dividends annually for decades. A word of caution, though: Companies can reduce or eliminate dividends at any time without notice. In fact, during the long market slump we experienced, some companies did cut back on their dividend payments.
Not all stocks pay dividends, of course. But in any case, if you’re going to maintain a balanced portfolio, you’ll al so want to own other types of investments, such as bonds. But many bonds — along with other fixed-income vehicles, such as certificates of deposit (CDs) — are not good “inflation fighters” because the fixed rate of return they offer simply may not keep up with inflation. Consequently, you may want to explore a “laddering” strategy. When you build a bond ladder — that is, when you purchase a group of bonds with varying maturities — you’d have more flexibility in combating inflation, because your longer-term bonds typically offer higher interest rates.
What about the so-called “inflation hedges,” such as commodities and real estate? Actually, these hedges are extremely volatile and should be approached with great caution. You need look no further back than the bursting of the housing bubble to see that real estate can go down just as fast as it goes up — and once down, it can take years to recover.
In your efforts to invest wisely for the future, inflation is only one variable you need to consider. But it can be an important one — so make sure you choose the investments that both address inflation and can help you make progress toward your financial goals.
reddog (K. B. Thomas Jr.) says...
Leading stock market indices have been up for the past several weeks and many folks think that good times are here again. I think the volume might be "fictitious," coming as a result of a growing number of highly intelligent computers that sense trends and make huge number of trades in milliseconds. This is called high frequency trading. As I understand it, the computers drive prices and then dump stock just as quickly, leaving the average investor behind. Trader Joe Saluzzi told a national TV talk show that 60 to 70 percent of the volume is from these computers and the biggest computer wins. In a recent 45 day period, Goldman sacks made 100 million dollars a day. According to Saluzzie, a shocking statistic is that the majority of these trades is being done by only 2 percent of the 20,000 companies that are currently trading in the market. High frequency trading has become so noticeable that the Securities and Exchange Commission is investigating these types of trades and even Congress is looking into to protect 401ks. These computers force up stocks and then they short the sale to make huge profits. One market analyst noted: Now you know how Goldman Sacks and the big banks and hedge funds made their money last quarter.
August 25, 2009 at 12:02 a.m. ( permalink | suggest removal )
reddog (K. B. Thomas Jr.) says...
High frequency trades accounted for 21 billion dollars in profits in 2008. Sen. Schumer says SEC to ban "flash trading." The everyday kindness of the back roads in the Flint Hills makes up for all the greed in the headlines.
August 25, 2009 at 12:58 a.m. ( permalink | suggest removal )
reddog (K. B. Thomas Jr.) says...
Google Alex Jones high frequency trades and then hold your nose.
August 25, 2009 at 1:09 a.m. ( permalink | suggest removal )
reddog (K. B. Thomas Jr.) says...
google Mat Taibbi; How Goldman Sachs has been robbing us blind.
August 25, 2009 at 3:42 a.m. ( permalink | suggest removal )
reddog (K. B. Thomas Jr.) says...
Google the great american bubble machine: rolling stone
August 25, 2009 at 1:59 p.m. ( permalink | suggest removal )
reddog (K. B. Thomas Jr.) says...
August 25, Wall Street Journal front page; Regulators To Examine Goldman's Trade Tips.
August 25, 2009 at 3:39 p.m. ( permalink | suggest removal )
reddog (K. B. Thomas Jr.) says...
If necessary is the mother of invention, discontent is the father of progress---David Rockfeller.
August 25, 2009 at 3:49 p.m. ( permalink | suggest removal )
reddog (K. B. Thomas Jr.) says...
google glenn beck goldman sachs
August 25, 2009 at 6:12 p.m. ( permalink | suggest removal )
reddog (K. B. Thomas Jr.) says...
Google utube gold price manipulation bob chapman
August 25, 2009 at 9:14 p.m. ( permalink | suggest removal )
reddog (K. B. Thomas Jr.) says...
A little government and a little luck in life are neccesary, but only a fool trusts either of them.---F. J. O'rourke Parliament of Whores.
August 25, 2009 at 10:52 p.m. ( permalink | suggest removal )
reddog (K. B. Thomas Jr.) says...
"Invest for the long haul." Those five words are the most successful advertising campaign in history. This kind of thinking has cost the majority of Americans most of their life's savings. REALITY is that investing for the long haul does not solve the problem that stock markets go down as well as up; they go down a heck of a lot faster; and they stay down a whole lot longer than anyone can afford to wait. If you can wait 50 years to get your money back, you just might break even. Remember in real terms--and that's what counts--it took 65 years to break even after the 1929 crash. For most people the long haul for a stock market, after a majior collapse, is a lot longer than they will live.
August 26, 2009 at 12:24 a.m. ( permalink | suggest removal )