Retirement Reality Check

Do you have any idea of how much you need to save for the retirement lifestyle you envision? If not, you’re like the majority of Americans who have never done the math. According to the 2009 Retirement Confidence Survey conducted by the Employee Benefits Research Institute, only 44% of workers have tried to calculate how much money they will need for a comfortable retirement.

Nearly 47% of retirees left the workforce earlier than planned.

53% of American workers have saved less than $25,000 for retirement.

Whether you’re retiring today, a year from now or the idea of retirement is in the unimaginable distant future, getting a handle on what you need  ill help you prepare for the road ahead.

When workers have a better idea of what they may need they may respond by saving more.  In fact, investors with a financial plan typically have twice as much in savings and investments than investors without a written plan.

The first step is to get a handle on what your current cash flow position is now and what resources are available for saving for the retirement goal. 

There is a standard rule-of-thumb that you need to plan for 70% of your preretirement income.  But an individual’s reality is more complex.

It really depends on your health, family history of longevity, desired lifestyle and debt situation at time of retirement.

One of the myths of retirement noted in the Road to Retirement workshop series presented by Quest is that your personal cost of living will drop and you’ll pay less in retirement.  Given the reality of blended families, marriage at a later age, housing costs and increasing healthcare costs in retirement, it may be better to plan for 80%, 90% or even 100% of pre-retirement income.

When thinking about a retirement income goal, don’t forget about the potentially ravishing effects of inflation.  A dollar now will not likely buy the same amount of goods and services that a dollar one, 10 or 30 years from now will. 

So save early and often.  And don’t forget to include a good dose of equity – preferably dividend-paying type stocks to help counter the effects of inflation.

Now’s the time to start with a plan.  You can get your FREE Starter Roadmap here:  www.boulevardr.com/goals/SteveStanganelli.

Making the Most of the Plastic in Your Pocket

We live in a sea of credit, credit cards and debt in general. It’s the lifeblood of our economy and personal finances.

Now with recent legislative changes having taken effect in February, it’s time to reassess the credit cards we carry and make the most of them while avoiding any nasty bites from behind.

Cardholders have been receiving disclosures in tiny print from their credit card companies for a while now. But most of us ignore these densely worded forms. But there are hidden traps in them.

Sure, the card companies are not supposed to arbitrarily increase your interest rate on existing balances and it cannot apply payments to the lowest interest rate balances first.

On the other hand, the privilege of having a card will now likely cost more: the return of annual fees, inactivity fees and even fees if you use the card but not enough.

You could consider closing out the cards you don’t use. But remember that will likely have a negative impact on your personal credit score. One of the factors that a credit score is based on includes the longevity of an account and you could inadvertently be hurting your score by closing out an account that you don’t use. It may make sense to use the card for a few transactions to meet the minimum. But plan on paying these charges off in full each billing cycle.

If you do happen to carry a balance, then consider replacing your BIG BRAND card with one of the smaller competitors. These card issuers may offer better deals, lower rates and lower fees, too. Start with a credit union or smaller, local bank by logging onto FindACreditUnion.com.

To compare your existing cards and find other deals, you may also want to check out CardRatings.com or Savvy-Discounts.com.

Considering a balance transfer? Watch out. Big banks are moving to up the fee from the average of 3% of the balance to 5% and eliminating the dollar cap. Look for banks that will do such transfers and cap the total fee.

It’s your money and the one certain way to get ahead is to control the things that you can control. And by watching the details regarding your credit, you can control your costs. Put more into your pocket by reducing the bite from your plastic.

Deflation? Inflation? Lessons from The Three Little Pigs

Just when you thought it was safe to get back into the investing waters, talk of deflation has creeped back into conversation.

Why does it matter? Well, how you position your portfolio to deal with these two scenarios will make a big difference to your personal bottom line.

With inflation, your money is worth less the longer you hold onto it. So you’re more likely to spend in the now because prices may be moving up.

With deflation, your money may buy more later the longer you hold onto it as prices continue to drop. (Not good for a seller but a better deal for a buyer – just ask someone trying to sell a house in Florida these days).

Since consumers respond differently to these two opposing forces, the ultimate direction of them can have a decidedly different impact on how the recovery progresses because of the way consumers react and business respond to their actions. Ultimately, this will impact how to position an investment portfolio accordingly.

The Right Hook
During a fight a boxer may expect to be hit from both the right and left. It’s just not known when and with how much force. But a good boxer, like a Boy Scout, knows to be prepared.

First the economy has been peppered with jabs from the right that could result in higher inflation: expanding money supply, ballooning government deficits, higher commodity prices, weak currency value.

Given the huge inherited, current and projected government deficits here and abroad, the conventional thought has been that all of this government stimulus will ultimately result in “crowding out” private investment and raise the ugly head of higher inflation down the road. The prospect of higher taxes to pay for these past deficits also lends support to these thoughts.

Recent run-ups in certain commodity prices like oil and energy products have resulted in a rise in consumer prices in January bolstering fears of inflation.

The Left Hook

Now comes the left hook – the deflationary threat: asset prices continuing to fall, increasing slack in industrial capacity, and continuing pressure keeping a lid on labor expenses because of high unemployment.

Credit is still tight with bank lending down. While dollars have been pumped into the economy through the TARP program, it’s mostly sitting in bank vaults. Money that isn’t circulating isn’t a cause of inflation.

Recent economic reports have indicated that core consumer prices actually are flat, well below the 10-year average of 2.2%.

Despite some recent reports, housing prices and rents are down and still expected to fall in key markets, dampening the immediate threat of inflation.

Defensive Portfolios: Lessons from Spencer

The best and strongest home depends on your environment and the threats faced.

Each evening before putting our infant son, Spencer, to bed, we read a story. The favorite for now is

The Three Little Pigs

(undoubtedly because of Spencer’s dad’s animation).

We all know the story: Three pigs, three houses built from different materials, one pig survives because of his well-built brick house.

The same can be said for portfolios. Heck, a house of sticks can provide some shelter in some circumstances but what happens if a big bad wolf shows up?

Since we don’t know which type of bad wolf will be showing up at the door (inflation or deflation), it makes sense to be positioned to survive either threat.

The elements of a portfolio will likely be the same regardless of an investor’s mind-set. The differences will be in the proportion of the components used.

Inflation Protection Portfolio
To protect this type of portfolio consider elements more likely to retain value even as inflation increases. Example: Commodity funds or ETFs; inflation-linked fixed income funds that include TIPS and/or floating rate notes; Real Estate Investment Trusts or REIT funds (10%); Cash to take advantage of higher short-term interest rates.

Deflation Protection Portfolio
The majority of this type of portfolio is positioned in long-term Treasurys followed by cash and municipal bonds. As consumer prices and interest rates fall, the fixed income stream from the bonds would be worth more.

To protect against surprise inflation, a smaller proportion would be set aside into TIPS, commodities and higher-quality/large cap US stocks.

Little Pig, Little Pig, Let Me In
Not sure where the market will go? Not sure which threat to expect? Learn from the third little pig: Build the strongest house possible.

If there is inflation, the economy will be expanding. As such equities will be the place to be. So consider an allocation of 20% to 25% in the US and a like amount in foreign equities. A portion of these equities should include high-quality firms that are dividend-paying. Commodities and cash will likely benefit from inflation so a 10% allocation to each is prudent. The fixed income component can include some exposure to TIPS (5%) as well as intermediate high-quality bonds (20% – 30%).

To hedge against the risk of deflation, a portfolio with exposure to municipal bonds (5%) and long-term Treasurys (5% – 10%). And some of the equity portfolio should include exposure to consumer staples that tend to do well in such an environment.

To provide some added diversification consider adding positions in companies that focus on infrastructure and firms that can maintain pricing power like utilities, pipeline operators and the like.

Taking these steps should allow an investor to sleep better at night. At least it works for Spencer.

Vacation Planning or Financial Planning? Which Do You Spend More Time On?

A recent WSJ/Market Watch online article showed the recent results of a survey conducted by Lawyers.com.

To see the article, click here or paste this URL into your browser: http://www.lawyers.com/~/link.aspx?_id=FB4FE9A5-7469-46CC-B225-44B3BCB5A294&_z=z

The unfortunate reality is that humans are not by nature very good planners for the long term. Most tend to think that such things are good in general but too daunting to take care of given the demands of our over-crowded daily lives. And besides, nothing bad will ever happen to me, right?

It’s sad to say that more people spend more time planning a vacation than worrying about something as dry and abstract as “estate plan.”

The only time such an important topic can cut through the thought clutter is to make it real and tangible. That’s why there was a spike in calls to get life insurance after the Twin Towers fell. That’s why there was an uproar during the whole Terry Schiavo case and folks started calling lawyers to draft health care proxies.

The benefits need to be broken down so that folks can relate. For example: What would you do if your house burned down? People can relate to the pain of being without a home and the devastating impact if they had to shell out cold hard cash from their own pocket to rebuild. Or you can simply show pictures of Katrina victims.

The equivalent is needed for getting people to plan. And as professional planners it’s our job to keep people focused on getting these things done.

Regardless of the amount of your wealth, if you have someone or something you care about, you need to have a plan. Otherwise, the state will gladly impose it’s own plan on you.

So how do you feel about a foster parent for your kids or leaving your hard-earned savings to Uncle Sam?

Money Moves to Ring in the New Year

“Sometimes all it takes to change your life massively for the better is a small action and a small success, “ says David Bach, a noted author on money matters. 

1. Consolidate Your Accounts:  Don’t wait for spring cleaning to roll around.  Make it easier on yourself by combining old 401(k) or IRA balances from your various old jobs.  This can help cut down on the amount of paper you receive and improve the chances you’ll have a coordinated investment plan. And it’s just one more way to have a more ‘green’ holiday.
2. Pay Yourself First: While there always seems like there’s more month at the end of your paycheck, you can only get ahead by making a point of putting aside money in savings.  It doesn’t matter if it’s just $5 or 5% of each paycheck as long as it’s consistent.  Start somewhere and try to build up to your target of at least 5% of your net cash flow. Direct the money into a separate money market account that you can’t access easily from an ATM or debit card.
3. Get to Know Where Your Money Goes:  For most people cash flow is not the problem. It’s cash retention that is a challenge. There always seems to be too much flow away from you.  Set up a system to keep track of where your money is spent.  Whether you decide to use a notebook or financial accounting software like Quicken or an online service like Mint.com, this is a first step to getting the information you need to decide what your spending priorities should be. 
4. Cut Expenses:  Armed with the information from your tracking, now consider ways to lower expenses.  Do you really need a daily Mucho Grande from your favorite coffee place?  At $5 a day, your habit could help pay for your annual vacation or pay down your credit card or mortgage debt. Do you really use all those movie channels?  Can you wear a sweater and lower the thermostat?  Do you really need to be in the mall? Cut down on impulse shopping by creating and sticking to a master list of groceries and household goods.
5. Reduce Temptation: Consider saving the bulk of any bonus checks or raises.  By automatically diverting this money, you’ll be able to add to your emergency stash, have cash to pay down debt or even invest. See #2 above.
6. Reevaluate Your Risk Tolerance:  One of the most useful services that financial planners can offer is helping you really articulate your goals and establish your tolerance for investing risk.  After the bumpy ride of the past 18 months, most folks realize that they may not have had a handle on this.
7. Avoid the Casino Mentality: It is an understatement that investing in the market can be risky but now is not the time to try to play catch up by “doubling down” or chasing the hottest investments ideas.  Remember the story of the tortoise and hare.  Sometimes the race doesn’t go to the swiftest but the most consistent.  So diversify your eggs into different baskets and watch those baskets.  For help in choosing the right mix of investments and a style that will help you sleep better at night, consider meeting with a CERTIFIED FINANCIAL PLANNER ™ professional.
8. Rebalance Your Investments:  Over time, accounts that have been consistently rebalanced tend to have higher balances.  So plan to rebalance at least annually or even quarterly.  But first you need to have targets in mind so that you can unemotionally prune back your winners while adding to the laggards.
9. Add to Your Retirement:  If you haven’t taken advantage of your employer’s sponsored retirement plan, start now.  If your employer doesn’t offer a plan or you’re self-employed, start your own.  Resolve to set aside at least the amount that will get you the maximum company match.   Ideally, you should know your “NUMBER” for living in retirement the way you want.  Consulting with a CERTIFIED FINANCIAL PLANNER ™ professional can help you here.
10. Get Planning Advice to Map Your Route to Your Goals:  Maybe you’ve winged it and thought your home and 401(k) were your tickets to a secure retirement.  Odds are that your planning is not filling the bill.  Sit down with a CERTIFIED FINANCIAL PLANNER ™ professional to discuss your whole picture and map out the action steps that will help keep you on track for financial success.

2010 Real Estate Investment Outlook and Perspective

What’s next for real estate?

For most people, real estate remains a critical part of personal net worth. Despite the stock market’s recovery, the average net worth of an American family is down about 25% because of tumbles in real estate values and investment assets.

Overview of Market Trends – Focus on Boston

While still suffering because of continued turmoil in the anchor employment areas of Financial Services, Insurance, Real Estate (FIRE), there have been signs of stability in and near major metropolitan areas like Boston. Although the employment picture remains bleak, the Boston metropolitan statistical area (MSA) showed the strongest gains in property values during 2009 according to a recently released report by Zillow Real Estate Market Reports.

Even with the strong gains helped along by the federal government’s first time home buyer credit and continued low mortgage interest rates, there remain nearly 25% of homes that are “upside down” on their outstanding mortgages.

High unemployment persists as companies continue to announce layoffs or delay hiring. And given the expected wave of creative mortgage products like Alt-A loans, interest-only loans and “pick-a-payment” adjustable rate mortgages resetting to higher rates putting pressure on homeowners who are unable to refinance because of lack of jobs or lack of value, there will likely be an increase in the number of foreclosures.

According to research reported by HousingPredictor.com, the major metropolitan areas in the US will likely not see a boom in real estate until after 2020. With more than 7 million people unemployed and another 20 million listed as underemployed, it may be 2017 or 2020 when these workers are absorbed. And real estate sales depend on those who have jobs.

Real estate booms have typically run in seven to 10 year cycles with some outside trigger precipitating a crisis that popped the bubble. The current situation is unlikely to be different.

Implications for Investors

Apartment vacancy rates are expected to rise through 2010 to about 7% to 10%. The continued collapse in confidence about jobs hampers household formation as individuals may delay marriage or move back in with parents or relatives or double up with friends.

As foreclosures rise, there will likely be greater demand for replacement housing so vacancy rates may fall. And as workers try to keep their options open to accommodate moving for job opportunities, demand for rentals will likely increase as well. The caveat is that there will also likely be a range of supply options that will put pressure on rents. And as a result of continued poor economic conditions, landlords can expect that credit quality of tenants will erode.

Apartments will have to compete with an increasing supply of single-family homes. Currently, the single-family homes available for rent has ballooned to nearly 10% compared to the long-term average of 4.5%. And a change of policy by mortgage servicer Fannie Mae will allow renters living in homes or apartments where the landlords have been foreclosed on to no longer be evicted. This will likely mean that largest landlord of single-family rentals in the US will be a quasi-governmental entity.

The volume of sales in the multi-family market is way off and likely to continue. Potential buyers continue to wait for prices to stabilize. There will continue to be an upward shift in cap rates by 1% to 2% approaching the cap rates of 2002 (8.2%) which will directly contribute to downward pressure on prices in the range of another 10% to 20%.

And given the more stringent underwriting criteria like higher down payment requirements, the number of investors capable of acquiring a property will likely be limited. But there will be opportunities for those investors with the capital and credit to buy when prices stabilize.

About Steve Stanganelli, CFP ®

Steven Stanganelli, CRPC®, CFP® is a CERTIFIED FINANCIAL PLANNER ™ Professional and a CHARTERED RETIREMENT PLANNING COUNSELOR (sm) with Quest Financial, an independent fee-only financial planning and investment advisory firm with corporate offices in Lynnfield, Massachusetts and satellite locations in Woburn and Amesbury.

Steve is a five-star rated, board-certified financial planning professional offering specialized financial consulting advice on investments, college planning, divorce settlements and retirement income planning using alternatives like self-directed IRAs.

For more information on financial planning strategies, call Steve at 888-323-3456.

Article Source: http://EzineArticles.com/?expert=Steven_Stanganelli

‘Tis the Season:Tax Gifts for Real Estate Owners

Is real estate still a good investment?

As a landlord dealing with sometimes rowdy tenants or unexpected repairs, you may wonder whether or not it’s still worth it.

Despite these headaches and the ongoing doom and gloom reported about real estate prices, owning investment real estate continues to provide a number of benefits.

Buying a property offers a number of favorable tax benefits, a way to generate income, diversify a personal investment allocation and in some cases have a tenant pay for your personal housing expenses.

As an investment property owner, you can deduct a host of expenses connected with operating the property including mortgage interest, property taxes, utilities and repairs. Aside from actual expenses incurred, property owners also benefit from a valuable non-cash expense: depreciation.

Losses generated from rental activities are typically considered to be “passive activity losses” with an exception for real estate professional. These losses can then be used to offset other passive income from another real estate investment or another type of passive investment such as in a private limited partnership. Disallowed passive activity losses and credits are deferred until there is passive income generated or the property is disposed in a taxable transaction.

Like all good rules there are exceptions. Although “passive activity” losses by rule must be used to offset other passive activity income, there are additional tax benefits available to those who are low- or middle income earning households.

For those who have adjusted gross income below $100,000 and “actively participate” in the management of the rental property, a real estate investor may use up to $25,000 in passive activity losses to offset non-passive income like income from wages or a business.

This remains one of the few tax shelters available to moderate income taxpayers. And like any other gift from the IRS, it comes with certain strings attached. In this case, the ability to use this passive activity loss exception phases out above certain income thresholds starting at $100,000 of AGI reduced $1 for every $2 of income above the threshold until eliminated at $150,000 AGI.

The key to “active participation” generally means involvement in management decisions about the property. Choosing the kind of paint or wallpaper? Reviewing bids for different contractors? Collecting the rent? All may be considered part of the active participation of the property owner.

About Steve Stanganelli, CFP ®

Steve is a five-star rated, board-certified financial planning professional offering specialized consulting advice on investments including self-directed IRAs and retirement income planning. Steve is affiliated with Quest Financial Services, a fee-only Registered Investment Advisor located in Lynnfield and can be reached at 888-323-3456.

Article Source: http://EzineArticles.com/?expert=Steven_Stanganelli

Skip the Allowance and Employ Your Kid

Do you own investment real estate or a business? Have you been considering buying a rental property or starting a business? Have kids going to college in a few years?

If you already plan on your kids going to college, it’s never too late to start planning effective and efficient ways to increase savings, lower your taxes and improve your odds for receiving student financial aid.

Let’s say you already give your children an allowance. You’re already paying out of pocket and not getting any tax benefit. With a few changes you can turn that cash outflow into a tax deductible expense that can even help your kids save for college.

Consider hiring them to work in your business or on the rental property you own.

By paying them a reasonable wage for services like landscaping, cleaning, painting, shoveling snow or doing office administrative work like filing, stuffing envelopes or printing marketing flyers, you have an additional deductible expense which lowers the net income or increases the net loss of your business or property.

And for children earning income in the family business, there is no requirement for payroll taxes. And if you keep the amount of “earned” income below certain limits, you won’t be at risk of paying any “kiddie” tax either. (“Kiddie” tax limits adjust for inflation each year).

In effect, you have shifted income from a taxpayer with a higher tax rate to a low- or no-income tax paying child.

Now get your child to open a Roth IRA with the money you pay them and they have the added benefit of tax-free saving for college since Roth IRAs can be tapped for college tuition without paying a penalty as long as the Roth is open for at least five years (restrictions apply).

By reducing your income, you can also reduce your Expected Family Contribution (EFC) which is the critical number used to determine the amount and kind of student financial aid your child can get for college. The EFC is calculated using a number of things including the amount and type of parental assets as well as reported income. EFC is recalculated each time a financial aid form is submitted and is based on the assets and income from the year before.

So to improve your odds for financial aid, one strategy is to lower your reported income. By employing your child to lower your business or rental property income, you may be able to lower your EFC and improve the amount of aid your child receives.

About Steve Stanganelli, CFP ®

Steven Stanganelli, CRPC®, CFP® is a CERTIFIED FINANCIAL PLANNER ™ Professional and a CHARTERED RETIREMENT PLANNING COUNSELOR (sm) with Quest Financial, an independent fee-only financial planning and investment advisory firm with corporate offices in Lynnfield, Massachusetts and satellite locations in Woburn and Amesbury.

Steve is a five-star rated, board-certified financial planning professional offering specialized financial consulting advice on investments, college planning, divorce settlements and retirement income planning using alternatives like self-directed IRAs.

For more information on financial planning strategies, call Steve at 888-323-3456.

Take Control of Your Retirement – Discover the Power of Self-Directed IRAs

Did you know that close to $4.2 Trillion in IRA and retirement account assets can be invested in much more than the standard run-of-the-mill investment choices offered at Big Box investment companies?

Ever since IRAs were first introduced in the 1970s, investors have been permitted to invest in a range of stock market alternatives including non-publicly traded assets such as real estate, notes and loans, private equity and tax liens.  But not many financial advisors and even fewer investors are fully aware of the options.

Legendary investor Warren Buffett uses a simple rule for success:  Invest in what you know and understand.  Diversification offers risk protection. And what better way to diversify than to own something that you have experience with like real estate or a business?  

You may find greater portfolio diversification and a return-on-investment that might be better geared to meet your individual goals when you consider investing in what you know from experience.

Any IRA including a traditional IRA, SEP, Roth IRA, Coverdell Education Savings Accounts and solo 401(k) can use a portion of IRA funds to acquire interests in these various stock market alternatives.   Essentially, an investor determines the amount and source of the funds, transfers them to an independent third party custodian to hold and then instructs the custodian to release funds to acquire an investment in one or more alternatives.  The custodian also holds all income for the investor derived from the investment.

The “rules of the road” can be complex but not impossible to navigate with proper guidance.  Basically, an investor, spouse, lineal descendant or fiduciary advisor is a “prohibited person” and cannot “self-deal” or make personal use of the property.  With few exceptions, a “prohibited person” cannot work for or take income from an IRA investment. 

What can an investor do?  Combine multiple IRAs from many individuals along with personal funds to buy property as co-tenants, for example.

It’s easier to list the things that a self-directed IRA cannot use as possible investments.  These include 1.) collectibles, 2.) life insurance contracts, and 3.) stock in a Sub-Chapter “S” corporation.  Most everything else is fair game.

If structured properly, the self-directed IRA can act as a lender to help facilitate a real estate transaction. Self-directed IRAs can invest as a member of an LLC or as a stockholder of a C-Corporation or even as a Limited Partner.  This is one way to add a level of asset protection to an investment.

Harnessing the power of a self-directed IRA may offer an investor a whole new way to invest and get retirement dreams back on track.

For a guide to Self-Directed IRA Basics including the “rules of the road” for avoiding IRS trouble spots, please call 888-323-3456 or email steve@questfsi.com for a free copy of the notes from his presentation made to GLLA members on November 11, 2009.

 

About Steve Stanganelli, CFP ®

Steve is a five-star rated, board-certified financial planning professional offering specialized consulting advice on investments including self-directed IRAs.  Steve is affiliated with Quest Financial Services, a fee-only Registered Investment Advisor located in Lynnfield and can be reached at 888-323-3456.

Inflation and the Rising Tide: Protecting Your Assets

For individuals in retirement living on a fixed income, it can devastate one’s savings and lifestyle.

As a bond or CD-holder, the purchasing power of regular interest income gets hit.  As a stock investor, stock prices can suffer as profit margins and earnings of your equity holdings are hurt by the higher costs for inputs like energy, precious metals and labor.

Right now, Wall Street is in a good mood.  For the quarter just ended, the Dow has gained about 14%, the S&P increased 14.5% and the NASDAQ was up 15%.  In fact the last time the Dow saw such a large quarterly surge was back in the fourth quarter of 1998 when it rose more than 17% as the dot-com bubble was forming.

This quarter’s rally continued a trajectory that began in mid-March 2009.  It has been primarily propelled by glimmers of light at the end of the tunnel.  A variety of positive statements from Federal Reserve Chairman Ben Bernanke contributed to a more optimistic view.  Residential real estate sales continued to come back mostly prompted by a first-time homebuyer tax credit.  Corporate earnings have been up.  The popular “cash for clunkers” program spurred auto sales and by some measures consumer spending increased marginally even without the impact from auto sales.

Despite the Wall Street rally, Main Street is still hurting: unemployment continues to rise, business and personal bankruptcies have increased, bank failures are at their highest level and the dollar continues to weaken fueling fears of inflation down the road.

Signs of future higher inflation are on the radar screen:  All the government economic stimulus here and abroad coupled with mounting public debt; the Fed’s projected end of a program in March 2010 that will likely lead to higher mortgage rates; a Fed interest rate policy which has no place to go but up and rumblings that foreign governments and investors may not want to continue at their current pace of supporting our debt habit. 

So how do you position yourself to profit whichever way the tide turns?

Now, more than ever, it is important to have a risk-controlled approach to investing.  This is centered on an age-based allocation that includes exposure to multiple assets.

This is why we will continue to manage portfolios with an allocation to bonds and fixed income but there are ways to protect from the impact of inflation and still allow for growth.

1.)    Include dividend-paying equities:  Using either mutual funds or ETFs that have a focus on dividend-paying stocks will help boost income as well as return.   Stocks that pay dividends have averaged near a 10% annual return compared to a total return less than half of that for stocks that rely solely on capital appreciation.  Better yet, consider stock mutual funds or ETFs that focus on stocks that have a record of rising dividends.

2.)    Stay short:  By owning bonds, ETFs or bond mutual funds that have a shorter average maturity, you reduce the risk of being locked into less valuable bonds when higher inflation pushes future interest rates up.

3.)    Hedge your bets with inflation-linked bonds: Fixed-rate bonds offer no protection against inflation. A bond that has changes linked to an inflation index (like the Consumer Price Index) like TIPS issued by the US-government or ETFs that own TIPS (like iShares TIPS Bond ETF – symbol TIP) offer an opportunity for a bond investor to get periodically compensated for higher inflation.

4.)    Float your boat with Floating-Rate Notes: These medium-term notes are issued by corporations and reset their interest rates every three or six months.  So if inflation heats up, the interest rate offered will likely increase.  Yields in general are higher than those offered by government bonds typically because of the higher credit risk of the issuer.

5.)    Add Junk to the Trunk: Hi-yield bonds are issued by companies that have suffered down-grades – sort of like homeowners with dinged credit getting a mortgage.  Yields are set higher than most other bonds because of the higher risk.  Yet, as inflation heats up with a growing economy, the prospects of firms that issue junk improve and the perceived risk of default may drop. So as the yield difference narrows between these “junk” bonds and Treasuries, these bonds offer a “pop” to investors.

6.)    Own Gold and Other Commodities:  Whether as a store of value or hedge against inflation, precious metals have a long history with investors seeking protection from inflation.  It’s usually best to focus on owning the physical gold or an ETF that is tied directly to the physical gold. Tax treatment of precious metals is higher because of its status as a “collectible” but this is a minor price to pay for some inflation protection.  And because the demand for commodities in general increases with an expanding economy or a weakening dollar (in the specific case with oil), owning funds which hold these commodities will help hedge against the inflationary impact of an expanding economy.