Money Crashers » Investing

Performance Update On My Rollover IRA

Erik Folgate — Fri, 18 Sep 2009 03:21:43 +0000

If you’ve been following my “experiment” with my Rollover IRA ETF funds, then you know it’s been doing pretty well. In fact, a friend of mine told me that he has a friend who actually followed suit and invested in the same ETF’s as me! While this scares me a little bit, I am sure he is pleased with the 46% gain on his money since March. Here is the breakdown:

(March 1st 2009 – Present)

BND: VANGUARD TOTAL BOND MARKET – (1.34 %) loss

I am thinking about getting rid of this. I only have about 7% of my portfolio in this fund, but I just got it as a small hedge against the market going down more back in the spring.

IGE: ISHARES S&P NORTH AMERICAN – 43.28 % gain

This is an ETF that tracks companies involved in North American natural resources. Honestly, I can’t really explain why this fund has done so well, other than the fact that these stocks were hit so hard in 2008, that the only natural thing to do was rebound.

IVV: ISHARES S&P 500 INDEX – 31.75 % gain

The S&P has risen nearly 400 points in the past six months. I knew the market would recover, and the S&P is my favorite index to track. I think it does the best job at capturing a snapshot of the market without investing in the entire stock market. This one hasn’t surprised me.

IYR: ISHARES DJ U.S. REAL ESTATE – 58.19 % gain

The real estate market plummeted in 2007 and 2008. Even though it hasn’t rebounded much in 2009, things have stabilized, which has allowed many REIT’s to recover. I am still skeptical about this ETF, because REITs are very volatile. It’ll be interesting to see what the gain is on this fund at the end of the year.

VIG: VANGUARD DIVIDEND APPRECIATION – 26.15 % gain

Even though this fund hasn’t been killing it, I know that I will be keeping it for a very long time. It pays a decent dividend, doesn’t fluctuate in price too much, and seeks trusted companies that pay a large dividend.

VWO: VANGUARD EMERGING MARKETS – 27.59 % gain

This is another one that I will keep long-term. Emerging market funds are volatile, but Vanguard seems to know what they are doing on this one. The expense ratio is extremely low, and it has a great track record over a period longer than 6 months.

XLF: FINANCIAL SELECT SECTOR SPDR – 95.24 % gain

Save the best for last. I never thought in a million years this fund would gain 95% in six months! That’s absurd. My only thought process behind selecting this fund was that the financial sector had been beaten down so brutally, that I believed it was extremely under valued back in the early spring. It turns out that I was right. I expect this ETF to decline at the end of the year, but it will still be the main reason why I recovered all of the money that I lost in my 401(k) from 2008. I wish I would have pumped more money into it at the beginning of the year! But when you invest, you can’t think of it that way. Related Posts:

Performance Update On My Rollover IRA is a post from: Money Crashers

Help A Reader: From Buying A House to Selling Wholesale Goods on eBay

Erik Folgate — Thu, 03 Sep 2009 20:49:23 +0000

I answer all of these questions with what I would do, so don’t take my word as gospel. Surround yourself with a team of professionals that you trust like a financial planner, accountant, good real estate agent, and attorney, before you make any final decisions such as these.

I am looking into purchasing a house for 80K. Payments are about 680 a month with insurance and taxes already included.

In order to tell you if I think buying this house would be a good idea, I’d need to know more information. If $680 a month would be no more than 25 to 30% of your take-home pay, then I think it’s a good deal. If not, then stay away from buying for now.

I have about 50K cash that I want to use for something with fast return. I was looking into duplex homes that require 25 to 30% down. My credit score is 750. I was also looking into buying some land here in Fort Worth, Texas and putting mobile homes there, but the cost to run electricity, plus the trailer home, plus plumbing, gas lines, and moving the used mobile home, may not be worth it. I was also researching bonds, stocks, and other avenues of investment.

I don’t believe in “fast returns”, and most investments that boast a “fast return” are scams. If you’re talking about generating immediate income from your $50k, then yes, a rental property would be the best way to go, but unless you can pay cash for a rental property, then it’s not worth it. Once you pay the mortgage, taxes, insurance, and maintenance expenses, there won’t be much left over for income in your pocket. The mobile home idea sounds like a really bad idea. Mobile homes go DOWN in value. Yes, you can rent them out and generate some income, but they are horrible investments.

If you’ve got $50k sitting in the bank, this is what I would do with it in this order:

Pay off any outstanding debts you have
Set aside an emergency fund of 3 to 6 months of expenses
Fully fund a retirement account like an IRA with growth stock mutual funds (about $5k a year)
Even before the retirement investment, once you’re debt free and have an emergency fund, I would put a chunk of that money towards the down payment on the house you are looking to buy.
If you’ve got anything left over after that, you can put it in growth mutual funds and index funds.

I am also looking into purchasing pallets of wholesale and sell on ebay. What do you think is the best thing to do?

As far as a quick return, I would definitely not go this route. There is a lot of risk involved with buying a wholesale lot of good to sell on eBay and Craigslist and actually turn a profit. Actually, you might have a better chance on Craigslist, because there are no selling fees to list on Craigslist. I once bought a lot of ipod replacement screens, because I saw them going for a lot of money on eBay. By the time I was able to put them up for sale on eBay, there was another line of iPods announce that were coming out and the value of them went down significantly. I definitely lost some money on that venture, and you will too if you’re not careful. I hate eBay now, because retailers came in and flooded the marketplace. Now, you have to literally give stuff away to compete on price.

That’s my two cents, take it for what it’s worth. Contact me again if you have follow up questions or shoot a comment below if you want to reveal your identity. Also, readers, please provide your input. I don’t claim to know it all, and many of you will have better ideas and thoughts than me!

Why Rich People Go Broke

Erik Folgate — Thu, 20 Aug 2009 03:56:30 +0000

I was reading Sports Illustrated, and I came across this statistic:

78% of former NFL players go bankrupt or are under major money stress due to joblessness within 2 years after retirement. 60% of NBA players are broke within 5 years after retirement.

Does that surprise you? It didn’t surprise me that a lot professional athletes end up squandering their wealth after they retire, but this number really caught my attention. How can it be that almost 4 out of 5 NFL players bo bankrupt? I think there are several reasons for this:

Lack of Financial Education. NFL players go to a rookie orientation for one weekend before they start their career in the NFL, and they touch on money management for about an hour, and that’s all they get for the rest of their career. It’s not the job of the NFL to teach grown men how to handle money, but the overall lack of personal finance education in America is severely deficit. Think about it, you’ve got a young man who was eating Ramen noodles one day, and now he’s getting $200,000 paychecks every other week. It’s not much different from winning the lottery, except you have to go to work every day and destroy your body.
Materialism. They get caught up in having the finer things in life, which is perfectly fine, but when the paychecks are reduced after retirement, it’s tougher to maintain the same standard of living. Athletes are not adjusting their lifestyle for the reduction in income.
Lack of Investment. Professional athletes are obviously not investing in long-term assets such as growth stock mutual funds and real estate. If you want your money to outlive you, you must invest it in assets with long-term growth potential and a track record for strong growth.
Lack of Planning. Setting up a long-term financial plan is essential to maintain your wealth. Wealthy people need to spend the money to surround themselves with a good attorney, accountant, and insurance professionals to help them with proper estate, tax, and insurance planning. One large medical expense or tax bill can significantly reduce one’s wealth.

It was sad to read about athletes squandering their wealth, but how can you feel sorry for them? At some point, we must take personal responsibility for our actions, and that is why you should not blame anyone but yourself when it comes to your current personal financial situation. Take charge of your situation. Get out of debt, and create a plan to build wealth!

Related Posts:

Why Rich People Go Broke is a post from: Money Crashers

Should You Pay For Your Child To Go To College?

Erik Folgate — Wed, 29 Jul 2009 17:30:41 +0000

Answering the questions of “should I pay for my child to go to college?” is a daunting task, but it should always be dictated by your personal and financial situation. Did you set up a college savings fund for your child when they were a baby? Did you not save a dime for your child’s education? Are the grandparents going to help with paying for college? The answer to these questions will help determine where your child should be attending college and if you’ll be paying for it. The decision brings with it a lot of emotions on your part and the part of the child. Your child will have their mind made up about where they want to go, but if you’re paying for it, you have the final say. Here are a few things to consider.

Don’t feel bad about not paying for their college education

Going to college is not mandatory for every child, and if you can’t afford to pay for it, the responsibility is shifted to the “child” who is not so much a child anymore. In our society, it is so taboo to think that paying for our children’s higher education isn’t our responsibility. But seriously, you gave them a roof over their head for 18 years with a full stomach, and you gave them every opportunity to succeed in high school. Don’t go into debt to pay for your child’s higher education.

Don’t Let Your Child Make The Decision

Guide your child to making the right decision. Don’t tell them it’s not up to them, but rather, participate in the decision making process. Most seniors in high school look at prestige, where their friends are going, and location of the school as determining factors. They rarely think about whether or not they can afford the school they want to attend. If you’ve bene diligent in saving for your child’s education, don’t let them burn through all of the money in two years just because they wanted to attend a private school. If you have enough money saved to pay for the $40,000 a year, then go for it, but if not, look at other options.

Going to community college for two years isn’t the end of the world

Many seniors think of themselves as losers for going to community college the first two years, but I still wish that I had gone this route. I would have saved myself $12,000 if I had stayed at home the first two years. The college experience is great, and I have dozens of good friends from college that I still keep up with. Some of my most favorite memories were made at UF, but your child can still experience that their junior and senior year. The dirty little secret that many universities don’t tell you is that the core classes you’ll be taking your first two years are exactly the same as they are in community college. You really don’t start taking classes for your major until your junior and senior year.

Should I co-sign on a student loan for my child?

The answer is flat out, “NO”. Why would you co-sign for someone who is broke and will be broke for a few years after they get out of school? I know you want to help them, but it’s just too risky.

The bottom line is that you can’t go back and mend your mistakes of not saving for college by getting into a bunch of debt to pay for your child’s education now. If they choose to go to a school that they can’t afford against your wishes, then that is their choice.

Where I am coming from on this issue

I spent my first three semesters at Toccoa Falls College, a private, Christian college in Northeast Georgia. The tuition was about $4,500 a semester, and the room and board was another $2,500 per semester. My parents had nothing to give me, and my grandmother left me about $2,500 in a mutual fund. I could not afford this school, but I was too dumb to realize it, and no one told me not to go. They were excited that I was going to a Christian school and playing basketball, and so was I. About a year later, I saw the money flying out the door and the student loans I was accumulating. My credit card bill got bigger and bigger, because I wasn’t working enough to pay for books and other living expenses. So, I left Toccoa, went back home and started community college. Then, I moved to Gainesville, finished my A.A. at Santa Fe Community College, and I was immediately accepted into the University of Florida. On top of the florida scholarships and grants, I was getting money BACK from the school with all of my tuition and books paid for. I had already accumulated $12,000 in loans, but I had stopped the bleeding. Don’t let your child make a big mistake and end up with mounds of student loan debt. It’s not worth it for your undergraduate degree. Community colleges and state universities provide great educations. Be the voice to your child that I didn’t have when I was making my college decision. Related Posts:

Should You Pay For Your Child To Go To College? is a post from: Money Crashers

Update On My IRA Account

Erik Folgate — Tue, 28 Jul 2009 02:07:13 +0000

If you haven’t noticed, the stock market has been doing very well lately. It has had a few ups and downs in the past 8 weeks, but overall, it has performed great in 2009. My IRA took a strong dive in 2008 like many others, mainly because I did not have it properly diversified. I had everything in very aggressive growth stock mutual funds in a 401(k) with my former company. Once I left that company, I rolled the money into an IRA, and since the amount was not too signficant, I decided to experiment with Exchange Traded Funds.

Here is a list of the funds I currently hold:

XLF: Financial Sector SPDR Index
IVV: iShares S&P 500 index ETF
IGE: iShares S&P North American Natural Resources
IYR: iShares Real Estate Inv. Trust
VIG: Vanguard Dividend Appreciation
VWO: Vanguard Emerging Markets
BND: Vanguard Total Bond Market

Now, here are the gains and losses for each fund since I purchased them in February of 2009. (expressed in terms of percentage)

XLF: 62%
IGE: 29%
IYR: 25%
IVV: 21%
VIG: 17.75%
VWO: 16%
BND: (3.8%)

The total percentage gain of the portfolio thus far is 28.25%. Obviously, buying XLF has paid off nicely, and it was a big gamble, but I was pretty confident that the financial sector was highly undervalued at the beginning of 2009. I am pleased with the performance so far, and I anticipate the Dow and S&P to close close to 10,000 and 1,000 by the end of the year. Don’t quote me on that, but it’s just a gut feeling that I have. The bond market fund is simply there as a hedge against inflation. I chose the natural resources fund and real estate, because like the financial sector, they too had huge hits in 2008, and I expected them to make a recovery in 2009 and 2010.

If you have any questions for me about this portfolio, please feel free to make a comment below!

Related Posts:

Update On My IRA Account is a post from: Money Crashers

The Way2Save Savings Plan By Wachovia

Erik Folgate — Fri, 17 Jul 2009 14:16:43 +0000

I was talking with a friend the other day about the Way2Save Wachovia savings plan, and he has had a great experience with it so far. He and his wife were able to save almost $2,000 in less than a year without consciously making an effort to save on a consistent basis. Bank of America had a “Keep the Change” savings program that is similar to this, and I am sure other banks have similar plans, but after reading about Wachovia’s program, I think it’s one of the better automatic savings plans for people that have a hard time saving money. Here’s how it works:

Sign up for a Way2Save account and any Wachovia Checking account and start saving. We’ll transfer $1 from your checking account to your savings account when you:

Use your Wachovia Check Card to make a purchase
Pay a bill online, including through Online Banking with BillPay note 1
Make automatic payments

Get paid to save with Way2Save

Earn a premium Annual Percentage Yield (APY).
Receive a bonus just for saving.

Save even more, by setting up recurring transfers for as little as $5 (up to $100) every month for even more savings and interest.

Here is the annual percentage yield breakdown:

Year 1: 5% of the eligible balance, up to $300
Year 2: 2% of the eligible balance, up to $300
Year 3: 2% of the eligible balance, up to $300

Fees Associated With the Account:

Account Closing Fee – Waived
Monthly Service Fee – Waived first year and thereafter with qualified transactions (automatic transfers), otherwise $5.00
Teller Withdrawal Fee – First three per month free; $3.00 each thereafter
Person-to-Person Transfer Fee – $3.00 per item
Overdraft Protection Transfer Fee – Waived with linked checking and Way2Save accounts, otherwise $10.00 per transfer

So, the APY isn’t great, but it’s still a no-brainer way to save some extra cash, especially if you want to develop an emergency fund without thinking about it. Also, there could be potential for getting nickel-and-dimed by some of those fees, but most of them are waived if you are active with the account.

Are you using this program? If so, we’d like to hear from you. What is the good and bad about this program?

How To Manage An Inheritance Or Lump Sum Of Money

Erik Folgate — Fri, 03 Jul 2009 17:57:28 +0000

At some point in our lives, we ponder the question, “What would you do if you were given a large sum of money?” We usually answer the question with a bunch of wishful thoughts like traveling around the world or buying a boat. We don’t like thinking about being responsible with a large sum of money. I think this is because many of us never think that we’ll ever run into a windfall of money. However, it could be more feasible than you think. Baby Boomers were a very successful generation, and as they pass away, their children will inherit large sums of money and assets. Many people feel burdened with the responsibility of managing the money, so here is a list of things to do with the money that you won’t regret.

Pay Off Debt

This should be the number one priority for anyone that falls into a large lump sum of money, whether an inheritance or contest winnings. Clean up your consumer debt such as car loans, credit cards, student loans, and home equity loans.

Fully Fund An Emergency Fund

Open a money market account or an online high-yield savings account. Fund it with 3 to 6 months of household expenses, and don’t touch the money except only for TRUE emergencies.

Invest For Retirement

If you have a lump sum of money, you can open up an IRA for you and your spouse (if married), and fully fund them for this year and next year, which will set you back about $22k.

Set Money Aside For An Upgrade In Car

Got a couple of clunkers in the driveway? Upgrade to better cars by paying cash, and this will set you up in a cycle that will help you never to have car payments again.

Set Up College Funds For The Kids

Many 529 plans let you put away $10,000 a year. If your children are young, contributing the maximum amount and letting it grow for the next 10 to 15 years will set them up for a nice college savings fund at age 18.

Have A Little Fun

If you’ve still got money left over after the above steps, then proceed to the next three steps. It’s your money, and you’ve already been responsible with it if you’ve followed the above steps, so have some fun with the money. Take a vacation you’ve been dreaming about, buy a jet ski or a motorcycle, or go on a mini shopping spree.

Give A Little

Make sure you give away some of the money to your favorite charity, church, or someone close you that needs it most. Be sure to be discreet about this, because you don’t want a bunch of people knocking on your door asking for a handout.

Pay Down Your House Mortgage

Last but not least, if you are still fortunate to have some money left over from the lump sum, you can apply it toward paying off your mortgage. Imagine how much money you could save in the future without a mortgage payment. You could pile up cash quickly, be more generous, and speed up your investment goals.

I realize that many of you don’t have the luxury of falling into a windfall of money, but there are still many people who have a pile of cash thrown into their lap, and they don’t know what to do with it. Be responsible, don’t go crazy, and take care of your financial priorities first.
Related Posts:

How To Manage An Inheritance Or Lump Sum Of Money is a post from: Money Crashers

How To Save Money Buying An LCD TV

Erik Folgate — Fri, 26 Jun 2009 01:53:04 +0000

During the summer, you will find great deals on LCD and Plasma TV’s, because manufacturers and retailers are looking to get rid of their older models to bring in new ones. As with any electronic device, manufacturers roll out a better model with more features every year to make consumers never be content with what they have. Apple does an amazing job with this tactic, and it’s one of the only things that annoys me about their company. The fact that the iPhone doesn’t have an FM radio, MMS text messages, and just recently got video playback is ridiculous. They have been adding one or two features to their iPods for the past five years, when they had the capability of adding all of the features from the beginning.

If you’re still in the “dark ages” and you haven’t bought an LCD or Plasma flat panel TV yet, you’ll pay significantly less than your peers as long as you don’t get sucked into buying the greatest TV since the ones last year. Analog television is done and retailers have a lot of incentive to draw you in their stores with deals on TV’s. Now is a good time to start looking for a deal on a flat panel if you have the money to buy one. I’m not going to get into all of the details about LCD, Plasma, refresh rates, contrast ratios, and all of that garbage, because there are millions of other sites that explain that stuff better than I ever will. If you are still wondering about the differences between plasma and LCD, here is my quick analysis.

LCD: It’s durable, it has vibrant colors, smooth pixalation, and it’s just better than plasma. There’s no glare on the screen, because it doesn’t have that plexi-glass covering that plasma displays have. It’s more expensive than plasma displays, but that’s because most people expect the existing plasma technology to go away soon.

Plasma: They are cheaper than LCD displays, they have a more clear and crisp picture than LCD. You can find bigger sizes with plasma. It’s less popular, because there are a lot of rumors that they will be changing the existing technology, and probably already have done so.

This post is not intended to educate you about what to buy, but instead, I want to help you save money once you’ve done all of your research. Here are a few quick tips:

Do your research! Knowledge is power. Use Google to your advantage, and read up on all of the different brands, specifications, and sizes. Evaluate your situation. Do you live in an apartment? Then, you should go for something in the 32″ to 42″ range. If you have a huge room, and you like to hold football watching parties, then 46″ to 50″ will suit your needs more. Also, figure out what is more important to you. Do you want a bigger television or one with a better picture? If you are upgrading from a standard CRT TV, then better picture shouldn’t be on your mind, because it will be much better than you are accustomed to.
Forgot about specifications that you don’t care about. The refresh rate, contrast ratio, and internet connection should not be important to you. TV’s have become like computers. The average user will never notice the difference between 1 GB of RAM or 2 GB of RAM. The average television watcher will never tell the difference between 5,000:1 and 10,000:1 contrast ratio. It’s silly to have someone at Best Buy try to upsell you a bunch of features that you’ll never care about. The only features you should really care about are resolution, the amount of HDMI jacks, and the size. You can find great deals on 720p resolution LCD TV’s right now, and they are great for your bedroom or as an extra TV. But for your main TV, you should go with 1080p, because it looks great for sports and movies. Also, don’t buy a TV with less than three HDMI jacks. All accessories that you buy now and in the future will use HDMI to hook into new TV’s, because you get audio, video and a great picture out of one cord.
Learn to negotiate. Retail stores will negotiate, but not if you don’t initiate it. There are two key ingredients to effective negotiation. You must have other options and knowledge. Knowledge is power, so don’t try to negotiate if you don’t know what you are talking about. Also, you need options. You need to show them that there are similar TV’s at a cheaper price from a competitor. Show a place like Best Buy, HH Gregg, or Wal-Mart that an online retailer has a cheaper price, and they will most likely match the price and give you 5% to 10% off that price.
Never buy HDMI and digital audio cables from a retail store. Monster cables are unbelievably overpriced, and there has been extensive research done by tech blogs that reveal that brand name HDMI cables are no better than generic HDMI cables. You can find HDMI cables from online retailers like Tiger Direct, Buy.com, and New Egg, for 60 to 75% cheaper than at a retail location.
Don’t buy into the paper-thin LCD TV’s. You can get LCD TV’s that are only 1 inch thick, and soon they will have ones that are only a 1/4 of an inch thick. This is crazy, and to pay $2,500 to $3,500 for this luxury just isn’t necessary unless you have a lot of money to blow. Don’t let the salesmen get you on this one.

If you have recently bought a new TV, we want to hear about your experience. What did you do to save money? Where did you buy from?

Tax Considerations For Self-Employed Income

Erik Folgate — Tue, 16 Jun 2009 14:20:21 +0000

I was talking with one of my best friends today, and he was asking for my opinion about SEP retirement accounts, and how he can reduce the taxes taken from the self-employed income he earns throughout the year. He does some public speaking and lectures that earn him some side income throughout the year, and he noticed that the money he made in 2008 was taxed at about a 30% rate. He was asking me if it was wise to open a SEP account and contribute the maximum amount to it in order to reduce his taxable self-employment income. There are a few things to consider here…

Why is he being charged a 30% tax rate for his self-employed income?

If you believe that you will owe more than $1,000 in taxes due to self-employment income, the IRS requiires you to file quarterly estimates for your taxes. If you do not file quarterly estimates and your tax liability from extra self-employed income exceeds $1,000, the IRS will impose an 8 to 9% tax penalty on top of the taxes owed. If he was in a 15% income tax bracket with 8% SSN and Medicare taxes and an 8% tax penalty, that that’s a 31% tax liability! Yikes!

If this is you, then you should file a 1040-ES form with the federal government by April 15th of the current year, June 15th, September 15th and April 15th of the following year. Estimate any tax deductions and credits that you think you will take for the year, then calculate your estimates quarterly tax based on your adjusted gross income after deductions and credits. If this is side business income, it shouldn’t be hard to do, but if your self-employed income is the main source of income in your household, you should definitely pay a good accountant to help you file your quarterly returns. Don’t worry though, if you overestimate, you can claim the remaining back in your refund the following year.

SEP Accounts

A SEP Account (Simplified Employee Pension plans), is primarily used for small business owners who want to set up a retirement plan for themselves and their small amount of employees at a reduced cost with less red tape. It’s a better solution for small business owners to start a SEP plan to contribute to their own account and offer an added benefit to their employees. My friend has an EIN number, so he had a good idea of opening up a separate bank account, placing all side income into that account, and then contributing “pre-tax” dollars to the SEP account before he files his quarterly returns. SEP accounts allow employers to contribute up to 25% of their income per account holder. I explained to him that this is a decent short-term solution, because it helps reduce the amount of his self-employed taxable income, but it should not be his primary retirement account. I like ROTH IRA’s, because they take after-tax dollars, and the withdrawals are not taxed at retirement. Any professional whose income will continue to rise as they age, should always try to set up retirement money so it is taxed early on in life at a lower tax bracket rather than later on in life when he or she could be in a much higher tax bracket.

I am not an accountant, so please consult a qualified CPA before you make any tax decisions about self-employment income. Related Posts:

Tax Considerations For Self-Employed Income is a post from: Money Crashers

Adjusting Your Portfolio for Inflation

Erik Folgate — Wed, 03 Jun 2009 02:00:12 +0000

The reason many investors are skeptical about this stock market rally is because a little word called INFLATION has not reared its ugly head on our country’s economy. Don’t believe anyone when they say that inflation will not take it’s toll on our economy in the long term. We have spent money that we don’t have, so that means we printed money out of thin air without any backing. Check out this graph from the Heritage Foundation:

As you can see, the spending has run rampant when Republicans were in control of Congress and now when Democrats are in control So, the blame definitely crosses party lines. So as a smart consumer and investor, you need to start thinking about adding some investments that hedge against an increase in inflation.

Inflation Protected Treasury Bonds

These treasury bonds pay interest adjusted for inflation. The 20 year rate is about 2.4% above inflation. The rate isn’t great, but having about 5 or 10% of your tax-sheltered portfolio in TIPS could be a good hedging strategy.

Buying Gold

I am not a big fan of gold, because it has a horrible long-term track record, but in the past five years, we have seen unprecedented government spending, so I think it’s a good idea to have a small percentage invested in gold to hedge against inflation. Instead of buying gold coins and hiding them under your bed, put some cash into an ETF that tracks the price of gold such as GLD.

Sell Long-Term Bonds

source: Wall Street Journal

Sell any long-term bonds, too. A bond guaranteeing 7% a year for 30 years won’t be worth much if inflation hits 10% and CDs starting paying 11%. Treasury bonds have sold off sharply, but corporates haven’t. The yield gap between long-term investment grade corporates and 30-year Treasurys, which was nearly 5% in mid-January, has fallen to 3.5%.

Of course, if the stock market continues to do well while inflation increases, your money is better left in the stock market than in cash. The problem is that your stock market gains will be less, because inflation will eat up your gains. I am not saying that you should go out and buy a bunch of inflation-protected investments products, but just keep it in your mind, because it’s inevitable given our massive federal debt load. Related Posts:

Adjusting Your Portfolio for Inflation is a post from: Money Crashers