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Inflation: How to prepare?

Posted by behaviorkelton (My Page) on
Mon, Apr 27, 09 at 15:18

Dave suggests that inflation in our future.

#1. That's right, Dave has reached the point that you merely need to say his first name in this forum. Kinda like Cher or Madonna... or rather, Sting.

#2. More to the point: So what are the strategies best suited for inflation? Gold? Specific sectors of the stock market?

BK


Follow-Up Postings:

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RE: Inflation: How to prepare?

Gold, about 5% or less of your investment assets. Could be gold coins (American Eagle, Canadian Maple Leaf, or whatever); or, an ETF that's indexed to the price of gold. I bought our coins before the ETFs were around. Today, I would opt for the ETF, because it's easier. With coins, if you're selling, you have to ship them & insurance costs a lot. Another alternative is something like Vanguard Precious Metal mutual fund. That one invests in gold mining stocks and stocks of companies of other precious metals like platinum, nickel and a bunch of others I've never heard of. It's a little less volatile that a straight gold strategy, because it's diversified across the other metals.

Of course Energy prices are also likely to rise, so something Vanguard Energy mutual fund might be good. It soared last year when gas was selling at $4/gallon, and then fell when the price of gas declined.

As for me, we bought our gold a few years ago, and some shares of Vanguard Precious Metals and Energy funds. So I think we're set. I didn't "plan" for inflation. I just assumed about 10 years ago that some day if there is a collapse in the economy, gold could go to $2-3K per ounce, or even more. That's when I'll sell to meet living expenses, so I don't have to sell stocks at a loss to make ends meet.


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RE: Inflation: How to prepare?

Hi Kelton,

#1. That's right, Dave has reached the point that you merely need to say his first name in this forum. Kinda like Cher or Madonna... or rather, Sting.

HAH!!!! (Leaving aside Sting comparisons regarding trantric accomplishments....)

"BEST" and "easiest" are different questions.

EASIEST are precious metals (the specie, not paper proxies. Actually, proxies are the easiest, but least secure.)

BEST (in my opinion) would capture the benefits of monthly cashflow/yield, leverageability (more control for less of your own cash, and using a locked balance of other's cash which is decaying at the rate of inflation. The BEST asset for this purpose is residential rental real estate.

Cheers,
Dave Donhoff
Leverage Planner


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RE: Inflation: How to prepare?

Dave!
I had no idea you are that famous!


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RE: Inflation: How to prepare?

In my own little mind I be ;~)
D


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RE: Inflation: How to prepare?

In my own little mind I be ;~)
D

Ohhhh, the wonderful power of the internet...

may yours be longer than 15 minutes.


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RE: Inflation: How to prepare?

Being a landlord?

That is certainly not the easy way, but it is an interesting idea.

I'm thinking of refinancing my paid-for house at this crazy low rate. At this "rate", it is hard to argue against it...right?


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RE: Inflation: How to prepare?

Hi Kelton,

I'm thinking of refinancing my paid-for house at this crazy low rate. At this "rate", it is hard to argue against it...right?

Ahhhh Kelton... while it *MAY* be hard to argue against, I'm QUITE confident there'll be PLENTY of folks who'll step up to the plate and have a swing... ;~)

Dave


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RE: Inflation: How to prepare?

Well, let's say that one finances their paid-for house, but does nothing special with the money received. Just a money market getting well under 2%.

Does this have any merit?... or does refinancing demand that the money get invested in a riskier prospect?


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RE: Inflation: How to prepare?

Well, let's say that one finances their paid-for house, but does nothing special with the money received. Just a money market getting well under 2%.

Does this have any merit?... or does refinancing demand that the money get invested in a riskier prospect?
Doing "nothing special with the money" is not using it to its fullest advantage, not good leverage, you're going to pay more than 2% for your money. What is the advantage, it is only good to hold it there while looking for your real investment.
Residential real estate is not a risky prospect, the tenant is paying your mortgage, over time your RE will increase in value.
Risky is buying in a bad area (Detroit comes to mind), or buying for the short term. It is possible to find very good, stable tenants, buy in a desirable area. I don't know your area, but in mine RE gives so many benefits. I don't know the future prospects of the tax advantage, but in the past it has been good.


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RE: Inflation: How to prepare?

Hi Kelton,

Well, let's say that one finances their paid-for house, but does nothing special with the money received. Just a money market getting well under 2%. Does this have any merit?...

It *might*... which brings a few questions to the forefront;
A) WHY would someone "do nothing special" with their equity?
If it is because there is nothing CURRENTLY that beats a 3% after-tax cost of money... what is the likelihood of inflation dramatically increasing rates (paid on deposits) in the future? It is EXTREMELY likely, I would suggest. When that time comes, the window of opportunity to CAPTURE the 3-4% mortgage leverage will be a distant memory.

B) If your cost of money is 3-4%, and your "nothing special" yield is 2%, you have a current NET cost-of-liquidity of 2%-ish. When you run into either a super-duper opportunity in the future (let's all hope!) or a super-duper emergency/tragedy in the future (God forbid... but better to be prepared,) then how much is that available-cash worth to you at that time?

If its tied up in your real estate, what will it THEN cost you to access it (if you even qualify at that time, considering the character of the "emergency.")

If you have to use alternative borrowing because its inaccessible, what might THAT cost you at that point of desperation?

If you simply cannot access your equity from ANY resource, and you suffer the consequences of the desperation or emergency at that future point in time, what is your potential scope of losses?

Lots of "IFs" to consider... but a current 2%-ish "cost of safety & security" (which is very likely to become a positive rate of return whenever inflation hits, or a "safety net" in cases of emergency) is relatively safe & boring in comparison. Superior "insurance" in my mind.

Cheers,
Dave Donhoff
Leverage Planner


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