The following article is very helpful in explaining how the official government figures of inflation — the CPI — are manipulated, and how the real rate of inflation is actually much higher. Therefore, in order to stay ahead of inflation one has to obtain a return on investments that is above the real rate of inflation. Furthermore, the article talks about ways to diversify one’s portfolio in case the dollar continues to lose value, which is quite likely considering how badly Ben Bernanke is printing money, and thus devaluing the dollar and stoking inflation..
Knowing the Rules of the ‘Money Game’
By: Sean Hyman
It’s hard to win a game if you don’t at least know what the rules are or who you’re competing against. Yet many Americans are stuck in this catch-22 situation. They earn a paycheck and spend their money as best they know how. The only problem is that they don’t always know how to win in their finances.
You have one opponent that is fighting against you in the financial arena. His name is “inflation.”
The government will tell you that we have about 3.2 percent inflation. However, go to the grocery store or the gasoline station and tell me if you think that prices have only gone up that much on an annual basis. You and I both know that it’s far more than that.
Many economists believe that the “real” rate of inflation is more like 6 percent to 8 percent. So why would the government be off by that much? Well, they’ve changed how inflation is measured something like 28 times since the latter 1970s. Why would they do that?
They want to continually come up with a formula that makes Americans believe that inflation is lower than what it really is. You see, they know that if America as a whole realized how much of their paychecks were really getting eaten away by inflation, they would be furious.
So that’s why the government will tell you that it’s 1 percent to 3 percent rather than 6 percent to 8 percent.
Many people don’t realize who their opponent is … but then, those that do underestimate the strength of their opponent because they listen to the government’s figures of how strong their opponent has become.
Therefore, realize that your number one enemy to wealth creation for your family is inflation. Then realize that you have to grow your money at a rate of 3 percent to 4 percent a year to keep up with that the government says inflation is…but if you really want to keep pace with inflation or exceed it, then you need to earn an annual return of 6 percent to 8 percent or more to get the job done.
This is why putting your money under the mattress doesn’t work. Each year, your dollars under the mattress are worth less and less in their purchasing power.
If you put them in a savings account, you might earn 0.25 percent to 0.50 percent. If you put it in a money market fund, you might go from 0.50 percent up to as much as 1.00 percent. That’s still not enough to do the trick.
One-, two- and five-year Treasurys don’t earn enough to keep pace with the reported levels of inflation. And just this past week, the 10-year Treasury’s interest rate went below that of our “reported” inflation rate.
Therefore, Treasurys aren’t a viable place to park your money right now either. So any type of “cash” savings instrument is out. Bonds are out. Real estate used to be a place investors could go to but we know that real estate is in the tank right now and that it’s widely believed that it will continue to be this way for a number of years to come. So real estate is out, too.
So where can you put your money to try to beat the rate of inflation? There are only a few choices left.
Here are the choices that I believe that you have left:
1. High-yielding dividend stocks (that pay a 3 percent to 4 percent a year dividend) that have solid balance sheets and tons of cash on their books. Bill Spetrino does a great job at finding these types of gems in his Dividend Machine newsletter.
2. Commodities. After all, if you look at what inflation is in its simplest form…it’s the rise in the cost of goods. So if you are invested in the goods that are rising, then you can keep pace with inflation. So investing in things like gold, silver, copper, agricultural commodities, etc., can be a place to fend off inflation’s threat to your wealth. So investing in commodities or commodity-stocks, you can fight a good fight. David Skarica has a newsletter called the Gold Stock Adviser that is excellent to follow to find out how to use commodities like gold and gold stocks to hedge against inflation.
3. Foreign currencies (particularly the commodity-currencies). As inflation heads higher, it means that the cost of goods is heading higher. As these dollar-denominated goods go up in value, the U.S. dollar loses more and more purchasing power against them. Therefore, if you want to fight against the rise of inflation, one way to do this is to get away from the currency that is eroding in value against these rising goods.
This means you have to “escape the dollar.” One great way to do this is to invest in foreign currencies from countries that are much more stable economically than the United States. For instance, right now, the United States has an unemployment rate of 9 percent. Singapore has an unemployment rate of 1.90 percent, Switzerland has an unemployment rate of 3.40 percent and Norway comes in at 3.20 percent.
So everyone isn’t as beaten up as the United States. Some countries aren’t falling apart economically like the U.S., Europe and Japan are right now. Therefore, the key is to get into these countries’ currencies and away from the falling dollar.
But another way to do it is to also gain access to currencies of countries that benefit from the rise of inflation/commodities by investing in the currencies of the commodity-exporting nations like Australia, New Zealand, Norway, Canada, Mexico, etc.
These commodity-currencies have been making some massive gains against the falling dollar over the years. So there’s never been a better time to be in them as the costs of goods are soaring so high.
I give my insights into foreign currency investing/trading through the Money Matrix Insider newsletter.
So whatever, you do … make sure you are constantly aware of your financial enemy – inflation … and that you are keenly aware of his “real” strength and how much you need to earn each year to win the fight against him.
These three groups of assets listed above are likely going to be the only assets that are viable candidates to successfully win the war on inflation over the coming years.
It would be wise to have some exposure to all three of these groups in my opinion. So check these experts out and let them help you out.
Every good boxer needs a good coach. If you’re going to be successful in fighting this beast of inflation that has grown ever-stronger over the past few years, then I’d encourage you to get a good ringside coach to help you in your boxing match against inflation.
In getting the right team together, you can fight an effective battle against inflation and come out on top over time.
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.