Wednesday, April 8, 2009

Inflation: What it Means For Different Investments

While everyone in the US are worrying about the unemployment rate, whether they will have a job next week, and if their 401k's will bounce back, there is another worry behind the scenes which will not really be a problem until the economic recovery takes place. That is Inflation! Why is inflation such a big worry in the long run? Because the US and other nations have pumped trillions of dollars into the economy. When the supply of money increases, there is more of it to bid up prices of every day items. This is inflation. In the 70's and 80's we saw inflation at a rate over 10% for several years. The problem with that is the money people are holding continues to be worth less and less in relation to what it can buy. So, with the possibility of some major inflation in the future, you should know how it will effect various investments:

Inflation's Effects on Stocks
The stock market doesn't have all that much correlation to the inflation rate. If inflation goes up, companies can just raise their prices usually and make things even out. Inflation can however cause mroe volatility in the stock markets

Inflation's Effects on Money In the Bank
You don't want to have lots of money in a savings account paying low inetrest when inflation strikes. As the inflation rate rises, that money is actually losing value if your interest rate you are getting from the bank isn't at least as high as the inflation rate. The good thing though with cash is that you can usually find a bank paying a rate that is over the current inflation rate. The one tip here is to not lock any money in a CD for the long term during periods of inflation unless you feel inflation rates have peaked.

Inflation's Effects on Gold and Oil
As inflation rises commodities, especially gold and oil should rise as well. If we have high rates of inflation then Gold and Oil are where you should have at least a portion of your portfolio.

Inflations Effects on Bonds
Inflation is terrible for bonds if you already own them. As internet rates and inflation rise, the older bonds values decline since they have less a yield. On the other hand, if you can get some long term bonds while inflation is high, they will likely go uop in value when it subsides.

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