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Tuesday, February 09, 2010

Part 2: Cash: Five Investments for Higher Inflation

My recent article titled "ECRI Global Inflation Outlook - Higher Inflation Ahead" showed that inflation pressures are building globally. In the United States, December CPI came in at 2.7%.

Just last week, ECRI, the Economic Cycle Research Institute, said "With the USFIG now advancing for ten straight months, underlying inflation pressures are in a sustained cyclical upswing, promising higher inflation in the coming months." Even in Japan, the threat of persistent Japanese deflation "continues to recede."

In this series of article I will discusses five investments that should do well in an environment of higher inflation. These are
  1. Part 1: Gold
  2. Part 2: Cash
  3. Part 3: Series I-Bonds
  4. Part 4: TIPS and TIPS Funds
  5. Part 5: Commodities
Part 2: Cash

Cash in savings accounts is one of the most conservative investment for rising rates. Cash is currently losing one to two percent a year to inflation as of the last reading, but until recently, cash was beating inflation. The idea with cash is you can usually get close to the current rate of inflation if you shop around. It is not perfect but it beats what could happen to bond funds should interest rates suddenly surge or bond investors sour on bonds.

Bonds will probably lose NAV (net asset Value) when rates go up but cash in FDIC and NCUA insured savings accounts is always worth a dollar per dollar saved plus you get higher savings account rates as rates go up.

I have a good deal of my money that would be or was in Vanguard and Fidelity's total bond funds (VBMFX Quote and Charts) and GNMA funds (VFIIX quote and Charts) now invested in savings accounts paying between 1.20% and 1.30% per year. I have it split between several banks and credit unions so I can get full FDIC and NCUA coverage. Currently you can get 1.50% at American Express Bank and 1.49% at Ally Bank. For more choices, see the February 9, 2010
I have critical mass (enough money to retire should I wish to stop working) so I am far more interested in preserving assets than taking risk with the fixed income side of my portfolio. I take plenty of risk with equities, especially in my "explore portfolio" where I have significantly out performed the indexes over the very long time. Of course, this great performance comes with considerable volatility so I want the fixed side of my portfolio solid to allow me to sleep well at night. That means I don't chase yield.

Of course, with CPI-U inflation now at 2.7% and expected to go up, money in short term savings and US Treasuries is losing ground to inflation. I like savings accounts over US Treasuries because the rates are better so less is lost to inflation.

For current rates, see US Treasury Rates - Quotes at a Glance

If you don't need the money for a year, CDs are another way to lock in a rate if you are worried the rates on savings accounts will continue the trend to go lower and lower each month.

See Best CD Rates - Top CD Rate Survey by Term

Next: Read the next article in the series "Five Investments for Higher Inflation: Part 3: Series I-Bonds "

Disclosure: I sold all my bonds and bond funds not indexed to inflation. Besides cash in many CDs and savings accounts, I own TIPS, TIPS mutual funds and Series I-Bonds. I also own and cover these investments in my newsletters. See Kirk's Two Investment Letters for more information.

Kirk Lindstrom's Investment Letter Performance

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