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-OT-Most of us are set up to do well if inflation stays low. What if inflation picks up considerably? Stocks and bonds could be in trouble. Here is an ultra-conservative hedge that you or possibly conservative others [relatives, parents] might be interested. Series I bonds issued by the U.S. Govt. Fairly new, they pay a fixed rate [currently around 3.3% plus whatever inflation is, or 5.05% in Feb.] No state tax, and tax deferral if desired. Mature a long ways away off [20 years I believe, can't find notes], but can be redeemed after 5 years with no penalty [1-5 years, 3 mo. interest penalty]. Interest added to principal and compounded. In Feb., I helped my mother in law with some planning, and as part of a package, we bought 30K I bonds [$30K is the maximum for a calendar year]. The people at a major bank including the investment officer knew absolutely nothing about them. When I explained the above to him, he as much as laughed as the idea as in Feb. oil and commodities were scraping the basement with no hope of recovery thus sealing the disinflationary case. That encouraged me to believe we had done the right thing. It is not that I believe inflation is coming back in a big way, but after 17 years of disinflation, commodities showing signs of life, a tight labor market, and the rest of the world showing signs of life, supply/demand over the next few years, indicate disinflation is less of a sure bet. Therefore, I think I-bonds are a worthwhile consideration as a hedge against a diversified portfolio weighed heavily in stocks and bonds. If inflation stays low, bonds and stocks should do quite well and even the I bond will give a decent real rate of return considering their guaranteed safety. If inflation creeps up and goes to 5%, 8%, pick a number, the I bond will be steaming ahead with that rate plus over 3% on top of it [while stocks and bonds would have tanked]. Applications can be picked up at most banks or from the US Treasury. Along the same lines, but less conservative, real estate investment trusts are worth a look. Some quality ones yielding over 7% with modest income growth from there. Some inflation protection, and if the long bond goes down and yields fall, should appreciate as the yeilds are quite high. They had a terrible year in '98, but are starting to pick up this year. Vanguard has an index reit fund. Or, one can check out individual names. Information on I bonds can be found by typing I bonds in search engines, or 1-800-USBONDS. The information above is the best of my knowledge, but not guaranteed accurate and is not specific advice. Have a great holiday weekend. Mike |
