Opinion

John Wasik

How to invest for falling prices

September 27, 2010
9/27 reuters column
Deflation’s Dreamy Opportunities
How to Invest for Falling Prices
By John F. Wasik
Okay, worry warts, you have official permission to be concerned about deflation.
This economically trying condition means that prices on goods and services may continue to fall (from 2008 meltdown levels), economic growth will be stagnant and savings yields will stink.
If this trend continues, it’s not bullish news for employment and the general economy, duly noted by the Federal Reserve last week. Yet it’s not the worst development for your portfolio, which is easily shored up.
Not having some measure of inflation means corporations that sell things or provide services typically can’t raise prices, create jobs or benefit from growing consumer demand. That also conjures up the scary image of Japan, which has been in deflationary mode for more than a decade and has propped up its so-called “zombie banks.”
The first tenant of deflation is that cash — as a profitable after-tax investment at least — is not king. Money-market funds, certificates of deposit and other savings vehicles will continue to offer paltry yields. They are still adequate places to harbor your money for emergencies and monthly bills, but that’s about it.
To boost your returns, you’ll need to look elsewhere and realize that you will have to take on more risk — if you can afford it.
Companies with cash in their treasuries (and not hobbled by debt) are good places to start. Not only are these companies generally well run, they are mature enterprises that are not likely to cancel dividends any time soon (well, BP was a surprise, wasn’t it?).
Cash-rich companies can pay dividends. My favorite vehicle for investing in a big basket of them is the Vanguard Dividend Achievers (VIG) exchange-traded funds. Vanguard’s managers select the most consistent dividend payers and hold them.
Don’t limit yourself to U.S. stocks, though. The Powershares International Dividend Achievers ETF (PID) looks globally for those companies willing to share their cash horde with you.
The least-obvious strategy is not even considered an investment by most: Pay down your personal debt. I know I sound like an infomercial when I say that rates may never be this low again. (If this deflationary mode lasts into next year or we head into a Japanese-type deflationary funk, I might have to eat those words).
Refinance any long-term debt you can (cars, boats, etc.). Deflation is a dream for those who need to pay down obligations or reduce interest payments. The money you save goes right back into your pocket.
With 30-year mortgage rates hovering around 4.4% and 15-year rates under 4%, it’s a great time to refinance.
I advised a friend recently who wanted to pay off his mortgage in a decade to contact a low-cost mortgage broker. He obtained a 10-year note for 3.8% (the shorter the term, generally the lower the rate). His family now has more money on hand to pay for college bills and other expenses.
As you think through how deflation could help you, don’t forget that it won’t last forever.
Avoid the temptation to jump into long-term bonds just for the slightly higher yield. Unless you are willing to hold them to maturity, you could lose money when rates climb again.
One of the best income-paying inflation hedges are still I-bonds or Treasury Inflation-Protected Securities, government bonds that are indexed to the consumer price index. You can buy them commission-free directly from the U.S. Treasury (www.treasurydirect.gov).  
And don’t make the mistake thinking that residential real estate is a good short-term investment during deflationary times. It’s not, except in areas of high demand, which are few and far between.
Got any perplexing financial concerns? Let me know. johnwasik@gmail.com
John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (www.culdesacsyndrome.com).”

Okay, worrywarts, you have official permission to be concerned about deflation.

This economically trying condition means that prices on goods and services may continue to fall (from 2008 meltdown levels), economic growth will be stagnant and savings yields will stink.

If this trend continues, it’s not bullish news for employment and the general economy, duly noted by the Federal Reserve last week. Yet it’s not the worst development for your portfolio, which is easily shored up.

japanNot having some measure of inflation means corporations that sell things or provide services typically can’t raise prices, create jobs or benefit from growing consumer demand. That also conjures up the scary image of Japan, which has been in deflationary mode for more than a decade and has propped up its so-called “zombie banks.”

The first tenant of deflation is that cash — as a profitable after-tax investment at least — is not king. Money-market funds, certificates of deposit and other savings vehicles will continue to offer paltry yields. They are still adequate places to harbor your money for emergencies and monthly bills, but that’s about it.

To boost your returns, you’ll need to look elsewhere and realize that you will have to take on more risk — if you can afford it.

Companies with cash in their treasuries (and not hobbled by debt) are good places to start. Not only are these companies generally well run, they are mature enterprises that are not likely to cancel dividends any time soon. (Well, BP was a surprise, wasn’t it?)

Cash-rich companies can pay dividends. My favorite vehicle for investing in a big basket of them is the Vanguard Dividend Achievers (VIG) exchange-traded funds. Vanguard’s managers select the most consistent dividend payers and hold them.

Don’t limit yourself to U.S. stocks, though. The Powershares International Dividend Achievers ETF (PID) looks globally for those companies willing to share their cash horde with you.

The least-obvious strategy is not even considered an investment by most: Pay down your personal debt. I know I sound like an infomercial when I say that rates may never be this low again. (If this deflationary mode lasts into next year or we head into a Japanese-type deflationary funk, I might have to eat those words).

Refinance any long-term debt you can (cars, boats, etc.) Deflation is a dream for those who need to pay down obligations or reduce interest payments. The money you save goes right back into your pocket.

With 30-year mortgage rates hovering around 4.4% and 15-year rates under 4%, it’s a great time to refinance.

I advised a friend recently who wanted to pay off his mortgage in a decade to contact a low-cost mortgage broker. He obtained a 10-year note for 3.8% (the shorter the term, generally the lower the rate). His family now has more money on hand to pay for college bills and other expenses.

As you think through how deflation could help you, don’t forget that it won’t last forever.

Avoid the temptation to jump into long-term bonds just for the slightly higher yield. Unless you are willing to hold them to maturity, you could lose money when rates climb again.

One of the best income-paying inflation hedges are still I-bonds or Treasury Inflation-Protected Securities, government bonds that are indexed to the consumer price index. You can buy them commission-free directly from the U.S. Treasury.  

And don’t make the mistake thinking that residential real estate is a good short-term investment during deflationary times. It’s not, except in areas of high demand, which are few and far between.

Got any perplexing financial concerns? Let me know. johnwasik@gmail.com

Photo: A man walks past the Bank of Japan building in Tokyo. REUTERS / Toru Hanai

Comments
3 comments so far | RSS Comments RSS

i dont know what is the best way to keep some value of youe assets, but i am sure the fastest way to lose it, is to play in the markets…how many ordinary investors have made money in the last couple of years?? for sure it is lower than 10%.

Posted by johny2 | Report as abusive
 

You simply couldn’t pick a better name for a stock fund than the VIG. Priceless.

Posted by JackMack | Report as abusive
 

Monthly Dividend stocks compound faster and can really add up quickly.

 

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