Last Updated: June 15, 2009
Runway inflation might be unlikely, but inflation is mostly likely in the forecast, according to financial planners. Indeed, from Wall Street to Main Street, financial planners and others are watching with some trepidation as interest rates rise on mortgage rates and long-term bonds rise.
For example, mortgage rates just hit a six-month high; the benchmark 30-year, fixed-rate mortgage rose 30 basis points last week, to 5.95 percent, according to the Bankrate.com national survey of large lenders. And the yield on the 10-year, U.S. Treasury bond has risen from 2.46 percent at the start of 2009 to 3.98 percent on June 10, 2009. Learn more about the U.S. Department of Treasury's Daily Treasury Yield Curve Rates.
What sort of tactical and perhaps strategic moves might you consider for your portfolio given current economic conditions and forecasts? In general, financial planners suggest on making sure you allocate your assets according to a plan and that you are well diversified. However, in times of inflation, financial planners typically suggest not making big bets on long-term bonds. Bond prices typically move in the opposite direction of yields. And, in times of inflation, especially runaway inflation, yields will rise and bond prices will fall, perhaps even dramatically.
"My approach remains centered on diversification across asset classes," said FPA member, Bill Howe, CFP®, of the Howe Group. For example, Howe has 1) increased the percent of his portfolios invested in commodities to seven percent, 2) changed the mix of his bond portfolio, moving from intermediate-term U.S. Treasury securities to Treasury Inflation Protected Securities (otherwise known as TIPS), and last, 3) increased the percent invested in foreign stocks and bonds, emerging market stocks (primarily weighted toward Asia not including Japan).
"My view is that the U.S. may well come out of (the current economic state) before the rest of the developed world but that the longer term demographics hugely favor better performance by equities outside this country," Howe said.
In general, Howe is underweighting U.S. bonds, overweighting emerging markets, and retaining normal weight in U.S. equities, increasing over the summer the amount invested in blue-chip, dividend-paying stocks.
For his part, FPA member, J. Michael Martin, CFP®, of Financial Advantage, said in a release that investors should consider a big — and probably dramatic — upswing in inflation. In the release, he said you can preserve your capital and earn a decent return today by doing the following:
Corporate bonds are better. Put more of your risk capital in quality short- and medium-term corporate bonds than in equities.
Stick to TIPS and Ginnie Maes (GNMAs) if you want government backing. Federally guaranteed GNMAs still have a 4 percent-plus yield, and the average maturities are about four years.
Gold still shines. Though the short-term rally has ended, gold bullion serves as a crucial hedge against all paper currencies. "The U.S. is far from being the only fan of currency devaluation," Martin said. "We think there is a better-than-even chance that we'll eventually see a competitive currency devaluation spiral internationally."
Pundits suggest a few things could bring back serious inflation, including the failure of the Federal Reserve to increase interest rates and tighten credit at the right time and the collapse of the dollar.
As always, FPA's Tip of the Week is for educational purposes only. FPA recommends working with a financial planner before making financial decisions to gather complete data and evaluate alternatives based on your unique financial situation.