Impending Inflation 2010-2012 - What You Should Do About It

This article was written by Paul C. Bennett. Paul is a Certified Financial Planner™ professional (CFP®), Chartered Financial Consultant (ChFC), Accredited Investment Fiduciary™ (AIF®) and Managing Partner of C5 Wealth Management, LLC . He is a featured financial advisor in Boomerater's Great Falls financial advisor directory.

You know the famous saying, "it's not a matter of if, but when". In my opinion, no phrase could be more apropos when it comes to imminent inflation. Simply stated, the Federal Reserve has been printing money like it is going out of style in order to stimulate the economy. Inflation, by definition, is when you have too much money in the system chasing too few goods. In other words, you have pent up demand and limited supply, so costs go up and up and up. You get the picture.

What do you do about this high inflation phenomenon? A captain of a ship requires lifeboat drills in order for everyone to be prepared before the storm comes. If you live in a flood zone, you purchase flood insurance before the flood comes. Similarly, you should perform your own lifeboat drills by preparing your financial "ship" in advance and you can purchase "insurance" for the inflation flood.

What should you consider? We have had our clients in three distinct areas of the market in order to mitigate the effects of high inflation. In no particular order, we have established positions in gold, TIPS (Treasury Inflation Protection Securities) and Energy.

Gold: Historically, individuals and institutions have flocked to gold as an inflation hedge against the economy and it has yielded strong results. It is also an effective inflation hedge against the declining U.S. Dollar. I feel the best way to get exposure to this precious metal is by utilizing a gold ETF that specifically invests in gold bullion, not mining and manufacturing companies. The SPDR Gold Trust ETF (symbol: GLD*) owns the underlying bullion in which it invests.

TIPS: TIPS are relatively new vehicles, as they first came on the scene in 1997. These instruments are pegged to the Consumer Price Index - the principal is adjusted for inflation semi-annually. The interest rate paid on the TIPS is a fixed rate paid on the inflation-adjusted principal. This ensures that the principal and interest payments are adjusted for inflation. That's not all, as they come with a guarantee too; at maturity - either 5, 10 or 20 years, if deflation has eroded the value of the TIPS, you are guaranteed to receive the original principal balance. TIPS are subjected to federal income tax but not state or local taxes. In addition to paying federal income tax annually on interest, you will have to pay tax on principal increases. You won't actually receive this interest until the bond matures, so it makes sense to utilize IRAs, Roth IRAs and other tax-deferred accounts to hold the TIPS. Vanguard's Inflation Protected Bond Fund (symbol: VIPSX*) or iShares Barclays TIPS Bond Fund (symbol: TIP*) provide TIP exposure.

Energy: Even without inflation, energy trends upward long-term. There are many ways to get exposure to energy. For most individuals, the best way to do this is via a no-load mutual fund or exchange-traded fund. Vanguard's Energy ETF (symbol: VDE*) has a modest .25% expense ratio and uses an indexing investment approach to track the MSCI U.S. Investable Market Energy Index, an index of stocks of U.S. companies within the energy sector.

As an investor, be optimistic long-term, but be realistic about impending inflation in the short-term. The bottom line is to be prepared, just like the ship captain!

*Disclosure: Mr. Bennett's firm, c5 Wealth Management, LLC currently utilizes the securities mentioned in client portfolios and he owns the positions personally

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