I came across an AP article on why Inflation hurts more today than 30 years ago and it’s quite interesting. Since we are talking 30 years ago, I thought I would share this Dire Straits video I’ve been obsessing over. This version is AWESOME so go ahead put on your head phone and click play. 8)
Circa 1981, I didn’t know anything about investment or inflation, but I can’t believe these numbers! I can’t imagine such a high rate of inflation and what it would to do to my savings.
The AP article mentioned that workers’ raises kept up with inflation in the 80’s and they were able to cope with high inflation pretty well. Paul Volcker, the chairman of the Federal Reserve, raised the interest rates to combat inflation and that also helped. Saving vehicles such as CDs, money market, and saving accounts all had good rates of return and enabled investors to keep pace with the inflation. The 10 years treasury bond yielded more than 13%, that sounds really good to me. That’s much better than the current stock market return and a whole lot safer.
Back to the present and although inflation has been lower than 2% recently, we all are feeling much more pinched. Over the last three years, the lucky ones have seen salary freezes and extremely low interest rates, my saving account is earning a paltry 0.75%. Of course, there are a lot of unlucky people who lost their jobs and that’s an even tougher situation.
Now that the gas price is rising again, it will affect all products and we will be feeling the pinch even more. Inflation will only get worse once the economy recovers in full – prices are rising as economy improved.
So what can we as investors do to hedge ourselves against inflation? Personally I haven’t had to deal with high inflation, but I have some ideas.
- Don’t tie up money in CDs or other long term savings vehicle like bonds since the rate is so low now. It’s probably better off to invest in something else until the interest rates improve. An alternative that will keep up with inflation is the Treasury Inflation Protected Securities (Mom Vesting).
- Invest in the stock market. The stock market historically outpaced inflation so I think it’s still a good long term investment. I hate to say it, but energy conglomerates like BP will be making a lot of money in the years to come so I’ll have to take a closer look at them.
- Keep working. If inflation really hits double digits, then retiree wannabes should keep working longer since their wages should rise a bit as well. It’s going to be tough to depend solely on investment income if inflation gets really high.
- Invest in rental properties. I think the housing market is nearing bottom and now is a great time to get a mortgage with very low interest. If inflation gets worse, the rent roll will increase and the mortgage loan will be easier to pay off. I’m inclined to borrow as much as I can now while the interest rate is low. What do you think about this?
- For those of you who were working in the early 80s, how does the current economy compare to the 80s economy? Do you have any tips?
What else would be good investments if we are transitioning into a higher inflationary period? What are you doing to hedge yourself against higher inflation?