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An Easy Solution to a Major Retirement WorryBy
Friday, July 23, 2010
"I'm worried, Doc... I hear so much talk on television about the government printing money and destroying the dollar."
Like many retirees, my friend Chris is worried about government spending... about taxes... about Social Security... and about inflation destroying his nest egg.
I don't blame him. I've been in the financial markets for over 30 years, and I've never seen such extreme government overreactions to economic problems. I'm sure it's going to cause problems years down the road. But if you're worried like Chris is, here's a chart you have to see... and a solution to your worries.
One thing that has folks worried is the threat of inflation. Many analysts point out the Fed has been "pumping money" into the economy to fight the recession. This will lead to inflation, the analysts say.
But my chart today shows inflation just isn't a danger right now...
 The chart above displays the past year's reading of what's called the "M1 money multiplier." This measures how quickly money is flowing around the economy. All you need to know about this reading is if it's over 1.0, banks are taking their depositors' money and loaning it out – money is flowing. As long as it stays below 1.0, the money is not circulating. As you can see, it's well below 1.0 right now.
This tells us one major thing...
In spite of the government's best attempts to stimulate the economy, things remain slow. Factories aren't buzzing. Jobs aren't being created. And prices have decreased. This is not inflation, but deflation.
Until I see a major change in the speed of money flowing around the economy, I believe we're in line for more deflation before we see inflation... Possibly years of it. Fortunately, there's a great way to earn safe income no matter what happens...
You see, while I'm not expecting inflation soon, I like to have insurance in case I'm wrong. That's why I like securities that provide a steady stream of income that increases my wealth during deflationary times... but also have the ability to increase in value if inflation picks up.
One such security is called the Vanguard Inflation-Protected Securities Fund (VIPSX). The fund trades just like a stock, and you can buy it from a full-service or discount broker.
VIPSX invests at least 80% of its assets in inflation-indexed bonds issued by the U.S. government. These bonds are called TIPS (Treasury Inflation-Protected Securities). They protect you from inflation by increasing their interest payments and your principal if inflation increases.
If the Treasury signals deflation, the coupon payment and the principal value decrease accordingly. But that doesn't mean you're not protected from deflation. If you hold the bonds to maturity, you (or in this case, VIPSX) gets the entire principal back from the U.S. government – 100% guaranteed. This is perfect protection should we experience deflation. As other asset prices fall, our investment holds steady.
To sum up... until money starts flowing around the economy, inflation isn't much of a worry. But by sticking with "win either way" securities like the VIPSX, you'll be protected no matter what.
Here's to our health, wealth, and a great retirement,
Further Reading:
If you like the idea of owning gold as a hedge against inflation, but you hate that it doesn't pay a yield, don't miss a classic Eifrig essay on making your gold position work for you. Find it here: Get Paid to Protect Your Savings.
As Doc Eifrig explained yesterday, he also likes the low-downside, high-income opportunity in big drugmaker Eli Lilly, which is paying a 5.6% dividend. Get the details here: Don't Buy Bonds Now... Buy These Instead.
Market NotesTHE CLEAN ENERGY FUND? YES, STILL PERFECTLY HEDGED Today, we take another look at one of most perfectly hedged investment funds on the market: The big "clean energy" fund, PBW.
DailyWealth readers know we believe long-term investors should focus on boring, dividend-producing businesses like Altria and Johnson & Johnson. The investor is best served by stable, dividend-paying businesses that produce "never go out of style" products like cigarettes and Band-Aids.
Yet many investors are enamored with the idea of investing in clean energy companies... most of which sport such terrible business models that we like to call them "perfectly hedged." They lose money in both good economic times and bad economic times. Their share prices are able to sink in both bull markets and bear markets.
For a picture of this hedged condition, we present the past two years of trading in the PBW. As an easy, "one click" way to go long solar, wind, and various other clean-energy companies, this fund has drawn in hundreds of millions of investor dollars over the past few years.
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