Soaring Public Debt and Inflation

I celebrated Fathers day with my daughters last weekend. As I enjoyed a great time dining out with my children I pondered, am I being a good father? I provide for them well and routinely spoil them by giving in to their wishes against my better judgment. I sock away sufficient financial resources for their education and other anticipated future needs. I content myself that indeed as a father I am a great provider.

But as a group across our nation how will this future generation judge my generation? Our predecessors, disciplined by the great depression were wary spenders, frugal and productive. We inherited from them a nation of great wealth and power. What are my children and their generation going to face as they grow into adulthood? Theirs could be a future where economic growth of the nation is held hostage by debt both public and private, diminished social safety nets and saddled with an aging population.

But then again, it is possible that we find resolutions to our current economic problems. New emerging technologies could dramatically change our competitive edge in the world. Numerous times in our history, we have triumphed against great odds. I hope that our ingenuity and our resourceful nature will put us back on track and we will resume our march towards greater progress and prosperity.

What if we are not very successful in resolving our public debt issues in a timely manner? How should I position my investment portfolio to protect and grow my wealth?  The first and largest threat to any long term portfolio is loss of purchasing power due to inflation.  Returns on fixed income securities or bonds suffer in an inflationary environment.  An alternative is treasury inflation protected securities or TIPS.  Real assets such as gold, metals and real estate can be good inflation hedges as they tend to rise in value in tandem with inflation.  Similarly certain sectors and industries do well in inflationary conditions.

How much inflation hedging does a portfolio need? The extent of hedging required depends on the rate of inflation.  So facts first. Today we are experiencing a sharp recession not economic catastrophe.   Current inflation pressures are benign to nonexistent, some experts would even present a case for deflation.  We are facing a possibility of rampant inflation in the near future, however it is far from certain that it will indeed happen.  Inflation hedging in a deflationary environment could diminish portfolio returns. The alternative course could be a measured and calculated approach to inflation hedging. One could over a period of time increase the amount of inflation hedging in small incremental steps as the risk of inflation rises or decrease the hedge as risks factors are mitigated. This could allow for a well diversified portfolio to take advantage of growth and income opportunities in the interim.

About Marc :

Marc Lewyn is the co-creator of Guided Wealth Transformation™  a revolutionary new process that helps one use not just their wealth but all of their resources to create the life that they desire and enhance the lives of people  they care about. Learn more about Marc >

Learn more about Guided Wealth Transformation™>

 

Financial Systems on the brink of Failure

Today we face an unprecedented lack of confidence:  in our banks and financial institutions, in the leadership at many of the publicly held companies and in the regulators who oversee their activity. Who do we trust? It does not help matters when Federal government is running large deficits.  If the public debt continues to grow at the current pace it would quickly become unsustainable and catastrophic.  This could leave our future generations buried under a mountain of debt, crimping economic growth, debasing our currency and the country losing its stature and clout in the world economic stage.  It would appear that our financial systems are on the brink of failure.

The  general malaise and lack of confidence is curbing spending and investments, both among individuals and corporations.  We have witnessed the federal government over the last few months stepping in time after time to prop up yet another industry or company that is deemed too big to fail.  Some economists have begun to question the future of our model of capitalism.

In this environment what is an investor to do?  How can a long term investor take advantage of the current conditions?   In uncertain times, the instinctive reaction is to run to safety of treasuries. While investing in stocks may appear to be  painful  in the near term, they could hold greater potential for higher returns in the future.

About Marc :

Marc Lewyn is the co-creator of Guided Wealth Transformation™  a revolutionary new process that helps one use not just their wealth but all of their resources to create the life that they desire and enhance the lives of people  they care about. Learn more about Marc >

Learn more about Guided Wealth Transformation™>

Bargain Frenzy hits the Real Estate Marketplace

Home prices have dropped 20% or more over the last year in many cities. Bargain hunters are out in force looking for that house around the corner that has been foreclosed upon. At first glance, it looks like a fantastic deal. If one is willing to sit on this investment for a few short years, it might appear that one could double their money or more!
But are these homes really that great an investment? When investing, many people quickly tend to focus on returns. Emotions tend to drive us to ignore the other side of the investment coin – that of risk.
It helps to step back and consider this particular investment from a larger perspective of your overall investment portfolio. Your risk/ return profile is impacted when a substantial chunk of your portfolio is locked into a single asset class ie “real estate”. There are additional risk factors in purchasing a house as an investment. A house constitutes a fixed single investment that is not particularly liquid and could incur additional expense and effort in ongoing maintenance. The neighborhood or house may fail to participate fully in a real estate market upturn reducing your returns.
You may be overlooking other investment opportunities. Stock and bond markets have suffered a decline along with the real estate markets and in some instances, have been hit harder than the real estate sector. They offer some attractive valuations that have not been seen in many years. The goal of high quality bonds is to offer protection of principal and pay fixed interest. Some stocks continue to pay substantial dividends. Stocks and bonds offer greater liquidity and transparency than investing in a single piece of real estate. They offer the opportunity for you to diversify across various asset classes, sectors of industry and across different regions of the world. Should you decide to increase your exposure to real estate, investing through a REIT may offer better risk adjusted returns and the added benefit of participating in a broader portfolio of properties.
Before plunging towards a decision, one needs to ask one final and perhaps the most important question. How does this investment serve to advance my overall wealth goals? A good wealth coach could assist you in defining your overall wealth and life priorities and filter any investment opportunity through the demands and constraints of this structure. This will help you to achieve meaningful advances without the everyday distractions of assessing one more purportedly “great investment”.