Financial Abundance Guide

Much of our current inflation is due to the weak dollar.  In 2001, the Fed began lowering interest rates and kept them artificially low until 2005.   During that time period, the dollar went from being worth 1.12 Euros to a value of only .75 Euros.

With the current banking debacle and the recent lowering of the Fed funds rate the dollar has declined to just .64 Euros, almost ½ of its 2001 value.

Let’s look at what this decrease in the value of the dollar has meant in terms of oil and gasoline prices.   If the dollar was as strong today as it was in 2001, we would be paying $71 per barrel of oil instead of $125.  Likewise, gasoline would be $2.25/gallon instead of $3.95.

With increasing inflation, sinking stock prices and low investment interest rates, is there any investment approach that will protect your financial abundance?  I believe there is!   Here are some of my ideas:

1. Lower you exposure to equities (the stock market) – While I do not believe in market timing, paying attention to current investment conditions is always wise. With increasing inflationary pressures, it will be difficult for the US economy to grow. Until we see signs that our government is interested in addressing economic growth by lowering corporate income taxes (the US is the 2^nd highest in the developed world) and strengthening the dollar, I recommend that you keep you equity position at the lower end of your allocation range.

2. Invest in stocks of high quality companies with high yields - The stock market will likely continue to decline in 2008. However, GE is an example of a quality company, yielding 4.3%, that will likely increase in value in the long term. In the meantime, you will receive a yield that is higher than money market or CD rates, with the dividends taxed at a maximum of 15%.

I do not recommend buying stock in any financial institutions until the sub prime mortgage mess is completely understood. However, if you are willing to take some risk, you might consider a Business Development Company. My favorite is Kohlberg Capital (KCAP). KCAP has an expense ratio of just 2.5% vs an industry average of 5.7%. It is trading at over a 35% discount to its Net Asset Value (NAV) and it is currently yielding almost 20% annually.

3. Use Treasury Inflation Protected Securities (TIPS) – If inflation persists, it will likely prove wise to invest a portion of your fixed asset portfolio into TIPS. TIPS are inflation indexed bonds that are issued by the U.S. Treasury. Their interest rates will increase as inflation increases. Two easy methods of buying TIPS is either TIP, an Exchange Traded Fund that is currently yielding 5.6%, or the Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX) mutual fund. TIAA-CREF as well as most 401(k) or 403(b) plans also offer an inflation linked bond fund.

4. Gold is a good inflation hedge – Gold has increased over 25% since I added it to the Model ETF portfolio in Q3 of 2007. In spite of its current value, it may still prove to be a good hedge against future inflation. I do not recommend placing more than 10% of your equity portfolio into gold. An easy way to own gold is through the ETF (Exchange Traded Fund) GLD.

Regardless of how you decide to invest in these challenging times, remember to stay well diversified and do not chase the latest investment fad.

If you would like help in determining how to invest in these inflationary, turbulent times, contact me for a no cost consultation to discuss your goals and Financial Abundance’s low cost asset management approach.