Inflation - winning strategies

Today, lets look into how we can position our money to protect against, or even win in, an inflationary environment. To help us do that, let's take a look at who wins and who loses when inflation hits.

Losers

1)Savers When individual dollars lose their value, the most obvious losers are savers. It really doesn't matter if its cash in the bank or under the mattress, savers lose. Their dollars are no longer even worth the effort they put into earning them in the first place.
Avoid: Checking accounts, savings accounts, cash.

2) Lenders You might be thinking this doesn't apply to you. WRONG! If you bought a CD from a bank, you are a lender. Same goes if you bought a bond or a bond mutual fund. Once inflation begins to become an issue, the first thing the Federal Reserve thinks about is how to slow down the inflation rate. The method the Fed uses to slow inflation is to raise interest rates. Suppose you bought a 5-year CD that pays 6% per year and the Fed raised rates so that current CDs pay 9%. The bad news is that you are stuck with a cruddy return. The worse news is that inflation could easily be higher than the 6%. Bottom line is that you are actually losing money and you cannot get out without losing even more. Talk about a double-whammy!
Avoid: CDs, Bonds, Munis.

Winners

1) Stocks If inflation is a general increase in prices, then it makes sense that anyone able to sell things at the new, higher prices has some protection against inflation. But be careful because this isn't a sure thing for every stock. Inflation is generally painful for consumers. This means that most people will not be able to buy or spend as much as they could during the good times. The companies that will do best are the ones that sell goods and services that people must have. Companies selling large, expensive items that people don't have to buy will usually underperform.

2) Commodities If you pay attention to the financial news, you are already familiar with this one. The gold sellers are busy defining gold as "real money" while the oil and gas partnerships are busy hitting the phones dialing disaffected stock market investors. Commodities do have a good chance of performing well in an inflationary environment but it doesn't always happen the way one might think.

2a) Fuels For instance, Oil and other fuels can be a decent hedge against inflation if production and demand remain constant. If demand falls because of economic slowdowns, then the price of oil will fall too. Another worry is if producers guess wrong about the economy and produce too much, they could flood the market and drive prices down.

2b) Metals Gold and metals are another option. Industrial metals derive their demand from manufacturing and they are vulnerable to the same issues brought mentioned for fuels above. Gold, on the other hand is often labelled as a great inflation hedge. Dollar down, gold up, right? Wrong. truth is, there is very little correlation between the two. More details here: http://globaleconomicanalysis.blogspot.com/2007/02/is-gold-inflation-hedge.html
Now let's be fair. Even though the correlation is minimal, it is negative. That means that it can be a hedge against inflation, but you should only expect it work about 1 time out of 3. Its also important to remember that Gold is used in a decent number of manufacturing processes, especially in the computer industry. As the computer industry grows, gold will become more of an industrial metal.

Conclusion

What makes inflation tricky is that the losers are easy to pick and the winners are little more difficult. We believe that the smartest way to handle inflation is to pick a variety of potential winners and invest in the top 6 to 12 ideas. Our concentrated approach gives our investors a good opportunity to profit from inflation's winners without trying to bet the farm on one single idea.

Log in tomorrow to learn how we keep downside risk down even in nasty markets

"In your best interest" - a dirty little secret

Consumers of financial advice have long faced the question, "How do I decide who to trust?" This has always been a tough question. Recently, it has become even tougher. As if tax laws, inflation and business risk weren't enough, today's investment advisor has to be proficient in deciphering the effect of economic bailouts, political uncertainty and an exceptionally volitile stock market.

Today, I'm going to talk about what industry insiders call "designations." Designations are the alphabet soup that many advisors place after their names. The general belief is that the more letters the salesperson can insert after their name, the more credible they become in the eyes of the potential client. This "more is better" approach can be summed up thusly: "Missy Doe, CFP, MBA, ChFC" must be more educated and more ethical than "Jane Doe." Even though it might be true in some cases, educated investors know these extras are often nothing more than peacocking and puffery.

One of the most popular designations is the CFP or Certified Financial Planner. In my opinion, there is an awful lot of misinformation about what this really means. A CFP is a generalist. A study conducted by the University of Arkansas points out how little this actually means to the investing public. This study asked current Financial Advisors who earned the CFP how well it prepared them to provide investment advice and services. The responses are shocking: the average answer was only "somewhat." Compare that to the 75% of respondents who said they earned the CFP to "Establish their professional credibility." Read the study here.

Another portion of the study worth noting has to do with the concept of fiduciary duty. A fiduciary is someone who is legally required to place the client's best interests ahead of their own. Obviously, this is a far cry from the self-serving sales pitches one might expect from a stockbroker. I have read many articles telling investors to choose a CFP because they are required to place your interests ahead of their own. This simply isn't true. According the University's study, fiduciary duties are not covered in the CFP curriculum. The fact that CFPs are not actually required to act as fiduciaries is also clearly stated by the CFP Board of Standards itself. According to the Board, the CFP code of ethics relies on voluntary compliance from its members. Frankly, that shouldn't be very comforting.

Is there anywhere an investor can go to ensure that he or she finds an advisor who is actually legally obligated to put the client's needs ahead of their own? The answer is a resounding, "Yes." But you are going to have to dig a little deeper than just reading their business card. The Investment Advisors Act of 1940 is the law that governs Registered Investment Advisors. These firms are required by Federal law to act as fiduciaries for their clients.

To search the Federal database of Registered Investment Advisors, click here.

To search for complaints or disciplinary action against a broker or advisor, click here.