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07/09/2009

What do inflation and swing flu have in common?

 

Inflation is a bit like swine flu.  There’s a lot of talk about it but no real solutions as to what average Joes and Janes can do about it.  When it comes to swine flu you can’t follow Joe Biden’s advice and not interact with crowds (damn hermits have the upper hand again!)  And when it comes to inflation you can’t vote out Ben Bernanke (Fed Reserve Chairs, with their immense amount of power are appointed.  A scary thought for another blog.)  My advice for swine flu?  Dammit Jim I’m a financial author not a doctor.  But I do have some simple steps to protect your pocket book from the seemingly inevitable rise in the cost of goods.  As prices go up, your dollars get less and less valuable since more dollars are needed to purchase that IPod. 

 

At the end of it all there are three basic ways to protect yourself from inflation.  You can buy real estate, you can buy precious metals, or you can buy an investment that comes with some sort of inflation protection built in (and there ain’t many of these.)  Let’s forget real estate.  If you can afford to buy it you would have done so already.  Real estate’s pricey, even in a down market, so I don’t consider that a “simple” solution to inflation.  Let’s also forget gold for the moment.  Indeed it is the precious metal everyone thinks about, but at $1000 an ounce, that’s not really simple either (though we’re getting closer.)  Instead consider owning a few silver coins (maybe selling for around $15 as I write this.)  Historically silver has done a bit better than gold and it requires less of a commitment.  While stocks have beaten precious metals over the long term, silver has never gone to zero (I’m looking at you GM). Worst case you can give your niece a coin or two for her birthday (now that’s a hedge.)  Where does one buy small quantities of silver coins?  Your local jeweler is happy to rip you off, so check his prices against www.apmex.com, which is happy to fulfill small orders.

 

Another rarely mentioned investment that’s essentially inflation proof is the I bond.  These are the new generation of savings bonds like grandma used to give.  You can buy them at your local bank for as little as $50, no commission, no fees.  They pay an interest rate AND an inflation adjusted rate, so the value of these bonds rises with the inflation tide. 

 

You won’t get rich buying a few silver coins or an I Bond every month.  But you won’t go broke either.  Those who didn’t read this may not be able to make the same claim. 

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If you can wait out the year of illiquidity, I bonds are pretty darn attractive place to stash some of one's emergency cash. You can set up automatic purchases for amounts as small as $25 via treasurydirect. The main knock on savings accounts is that inflation can erode them away. Not so much a problem with I bonds. It's also nice that (a) you know you can redeem them quickly for no fee at any time yet(b) they're clearly segregated from your other money, so you're only tempted to raid them for real emergencies. The fixed rate on them right now looks lousy, but keep in mind that you're buying safety and protection from inflation. Chasing yield for "safe" investments is a dangerous business. More than a few conservative-sounding funds blew up last year because manager were treating mortgage-backed securities like T-bills. Disclosure: this commentator holds I Bonds.

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