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Posted by Ignoramus1214 on August 21, 2008, 8:58 am
My personal opinion is that we'll see inflation increasing, possibly
to 15-20% per year, going on for a few years.
I do not really want to argue about it and want you to assume for a
minute that it is true and think under this assumption.
The question is financial planning. I am just a regular 37 year old
married guy with a house, over 50% paid off, savings,401k, IRA
etc. About 30% of my net worth is in Berkshire Hathaway stock, 25% in
the house, 30% in 401ks, the rest in some cash and Euro denominated
bank accounts. About 1 million net worth (which is not a big deal any
more). Nothing special.
What I DO NOT want to happen is lose a substantial chunk of what I
have, and worked for, due to inflation. I am OK with some volatility,
possibility of losing 20% due to volatility, etc. But what I do not
want to do is "lose everything" or "almost everything".
So I want to reposition my assets such that if considerable inflation
occurs, I would not lose too much. Things such as money market
accounts, and so on, are obviously not the answer. There are some
reality constraints, such as 401k limited to my [very lousy] set of
choices.
My question is what sorts of investments, would, more or less,
compensate the owner for inflation. I tend to lean, as a matter of
reality, towards keeping my Berkshire stock, buying a little more
Euros, moving some of my 401k plan money to the "international fund".
One possibility that I am considering is buying a couple of apartments
to rent out, but I am a little put off by the hassle factor.
Has anyone put any serious thought into inflation proofing themselves?
--
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Posted by John A. Weeks III on August 21, 2008, 9:57 am
> My personal opinion is that we'll see inflation increasing, possibly
> to 15-20% per year, going on for a few years.
> One possibility that I am considering is buying a couple of apartments
> to rent out, but I am a little put off by the hassle factor.
The problem I see there is that where I live, in the Twin Cities,
rents are so low and property costs so much that you cannot justify
making the investment. I use the rule of thumb that rent has to
be 1% of the purchase price each month to break even. So, on a
$50,000 unit, you need to get $500 a month. Most bottom end
rentals are in the $80,000 per unit range, but rents for them
are stuck in the $750 a month range. I cannot see doing all the
work and taking the risks just for break-even. You could simply
put the money into a CD and at least make a small profit.
> Has anyone put any serious thought into inflation proofing themselves?
I am far more worried about jobs and health insurance. I am
out of the health care system since my industry have moved to
the independent contractor model, and I have pre-existing
conditions that makes a personal health plan cost-prohibitive.
As long as the job shortage stays high or grows, people will
not have the excess money to buy much, and that should keep
inflation down over the long haul.
I have noticed that the things that I tend to buy have gone
up in price significantly over the past few years, much more
than what the CPI numbers would suggest.
-john-
--
======================================================================
John A. Weeks III 612-720-2854 john@johnweeks.com
Newave Communications http://www.johnweeks.com
======================================================================
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
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Posted by Dave Dodson on August 21, 2008, 10:13 am
wrote:
> My question is what sorts of investments, would, more or less,
> compensate the owner for inflation.
>
> Has anyone put any serious thought into inflation proofing themselves?
TIPS would provide the protection you want.
> Due to extreme spam originating from Google Groups, and their inattention
> to spammers, I and many others block all articles originating
> from Google Groups. If you want your postings to be seen by
> more readers you will need to find a different means of
> posting on Usenet.
> http://improve-usenet.org/
There is no reason to block Google Groups content in moderated
newsgroups like this one.
Dave
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Posted by Douglas Johnson on August 21, 2008, 2:27 pm
>My personal opinion is that we'll see inflation increasing, possibly
>to 15-20% per year, going on for a few years.
>My question is what sorts of investments, would, more or less,
>compensate the owner for inflation. I tend to lean, as a matter of
>reality, towards keeping my Berkshire stock, buying a little more
>Euros, moving some of my 401k plan money to the "international fund".
Having lived through the 70's, I can relate some experience. First, cash is
trash. It is worth less every minute. Of course, you need some for everyday
uses and emergencies, but that's not investment.
You want to own tangible things. Real estate is classic, but as John pointed
out, it has its own problems right now. My metric for real estate investment is
that it must have positive cash flow, including vacancy allowances, maintenance,
etc. Another advantage of real estate is it can be highly leveraged at low
interest rates. In high inflation environments, you want to be a debtor if your
interest rates are lower than inflation. This would call for refinancing your
residence at the highest loan to value that you can get.
You want to buy in bulk for staples.. This is one of easiest investments in a
high inflation environment.
International investments are interesting only if you believe inflation will be
localized to the US, i.e. caused by the Fed printing too much money while other
central banks don't.
Commodities are almost always volatile, but at least in theory, are tangible
things that will rise in price more-or-less in line with inflation. TIPS have
been suggested, but have the downside that you get to pay taxes on your
inflation return, which likely results in a net loss in nominal value.
Stocks should be chosen very carefully. The companies must have pricing power
and limited exposure to inflation in what they consume.
>Has anyone put any serious thought into inflation proofing themselves?
Having said all of the above, I think we're near peak for inflation. Deflation
is more likely. The argument goes something like this:
Inflation is caused by too much money chasing too few goods and services. The
current deleveraging of the economy is removing money very rapidly. Therefore
we will have less money chasing goods and services, not more.
Unlike the 70's, the Fed understands the first point very well. I think they
are more than willing to raise interest rates to keep inflation in check. We
are already hearing that from at least one voting member of the open market
committee (Richard Fisher). See:
http://www.dallasnews.com/sharedcontent/dws/bus/stories/DN-FisherQA_17bus.ART.State.Edition1.4d80510.html
They can get it wrong of course, but I think 15%-20% inflation for a number of
years is unlikely in the extreme. But I've been wrong before and will be again.
-- Doug
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Posted by dumbstruck on August 21, 2008, 9:09 pm
So much analysis becomes flawed by confusing inflation with higher
prices. Higher prices (HEADLINE inflation) may come from higher
average built in costs, which does not necessarily inflate the cost of
an asset you have hitched your financial wagon to.
What you need to seperate out is MONETARY inflation, which is the
arbitrary pulling up of virtually all prices due to overheated demand.
A very crude way to monitor that is CORE inflation, but even that
fails to subtract out some nonmonetary things. This is the corrosive
kind of inflation that needs vigilance by the Fed and by investors:
> Inflation is caused by too much money chasing too few goods and services. The
> current deleveraging of the economy is removing money very rapidly. Therefore
> we will have less money chasing goods and services, not more.
Confusing these two as they usually are can give the most evil brew.
For example plumbing codes are raised, or they have to drill ever
deeper for oil... that kind of thing should never be considered as an
inflation adjustment for wages or setting Fed rates because either the
product is upgraded or took more effort to produce. If gov't or union
workers get a wage bump based on non-monetary inflation, this simply
makes the remainder carry everyones(!) burden of increased cost or
benefit, and possibly create monetary inflation.
But for investors I would say there is a key subtype of monetary
inflation - BUBBLE inflation. The world has so much liquidity looking
for a home to pile into, and thus over years, months or even days
everyone piles in and out of oil, gold, real estate, Chinese stocks,
small cap US stocks, etc with little regard to fundamentals. It isn't
overall asset inflation, but is targeted based on transitory fashion
and jumping on bandwagons. Don't overlook that when choosing an asset
entry or exit point.
Of course all these types co-exist, and have to be subtly inferred
apart. Above all, do not confuse monetary inflation with higher prices
you happen to encounter. There should be a law against using the term
inflation without saying what kind...
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