Archives for November 2009
Today, we look at investment themes during periods of deflation.
- In deflation, debt is the enemy
- Risk is to be avoided
- Cash should be raised
- Seek high-quality bonds. By default these are US Treasuries, with the longest dated Treasury bond being 30-year maturities. While it is a little burdensome for an individual to buy single bonds which have a face value of $10,000, they can easily do so via the Barclays 20+ Year Treasury Bond Fund (NYSE: TLT). The Fund rose from $88.59 last June to a high of $123.15 in December and now trades in the $93 range. Dividend yield is around 3%. One could also look at high-quality corporate bonds, which can be accessed via the iBoxx $Investment Grade Corporate Bond Fund (NYSE: LQD). Dividend yield is around 5%.
- Laddered CDs offer a good investment structure
- Gold typically acts well
- Renting instead of buying a home should be considered
Rising unemployment and/or falling income with no way to pay the bills is the chief concern. The investment themes above should help you navigate a deflationary period.
We saw last time that the ingredients to deflation are present, this time, we look at how one can invest during these times.
Deflation, by definition, is a general decline in prices. It can be caused by reduction in the supply of money (not the case currently), reduction in supply of credit (yep), or decrease in personal or investment spending (yep). Deflation has the side effect of increased unemployment since there is lower levels of demand in the economy.
Declining demands leads to declining prices and if they persist, generally creates a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes and increasing defaults on loans by companies and individuals. Enter the Federal Reserve. They have tools (called Monetary Policy) to counter deflation…but their tools aren’t always successful. Deflation can be shortened by successful Fed action, or long if they don’t get it right, i.e. Japan has been in a period of deflation for decades starting in the early 1990s.
So, how does a person invest during such times? Answer: to be continued…
The Courier recently interviewed me for an article on young adults in there 20s and 30s investing for retirement. Sara Arthurs did a nice job writing this article and accurately quoted what I had to say. Here are the key takeaways:
- Start investing now!
- Newlyweds should make saving for retirement a priority.
- Saving for your retirement is your responsibility, not your employer’s.
- Don’t depend on Social Security for your retirement.
- Invest in the stock market.
- Get help from an investment professional.
- Take full advantage of matching contributions your employer might offer to your company’s retirement plan.
- If you are eligible, invest in a Roth IRA
- Be patient with your investments.
- Aim to be debt-free in retirement.
You can read the full article for more detail on these points.