Stock Rally Continues

While the Dow Jones Industrial Average and some other indexes posted small losses, stocks overall gained last week.  The NASDAQ Composite Index has advanced in each of the last five weeks, advancing almost ten percent since mid-July.  Smaller has been better during the rally.  Small- and mid-sized company stocks are outperforming their larger counterparts.  Investors can only hope this happy trend continues to produce a summer rally in U.S. stocks.  Unfortunately, the news for foreign stocks isn't so good.  The economic slowdown is spreading overseas, resulting in losses in foreign stocks at the same time U.S. stocks are advancing.     

What to Do With Your Investments if Inflation Heats Up 

First, a definition:  Inflation is a sustaied rise in overall price levels.  While inflation is often caused by an overheated economy, rising commodity prices, including oil, can also cause an increasing rate of inflation.  Inflation is often called a "stealth" threat to investors because it can diminish the purchasing power of your investments even if your investments are rising in value.  For example, if you're earning three percent on a CD but the rate of inflation is four percent, you're losing ground to inflation because, in this example, your investment return is a negative one percent when adjusted for inflation. 

Now, what can be done to protect your investments from inflation?  

• Commodities.  Since commodity prices tend to rise with inflation, an investment in a commodities index fund or exchange-traded fund might provide some protection. 
  

• Real estate.  Real estate also generally rises in value more when inflation is high, so investing in a real estate mutual fund or real estate stocks should be considered.
  
• Stocks.  Stocks have been shown in the past to be a good way to outpace inflation.
  
• Inflation-protected bonds.  The value of certain bonds is adjusted based on changes in the rate of inflation.  Examples include Treasury Inflation-Protected Securities (TIPs) and inflation-adjusted U.S. savings bonds (I Bonds).

The above recommendations notwithstanding, you should avoid making wholesale changes in your investments based upon a perceived threat that inflation will heat up.  In fact, recent declines in commodity prices and a strengthening dollar might stave off inflation.  But if you think inflation is likely to increase, you might want to take action with some of your investments.  For example, you might want to invest the proceeds from a maturing CD into a Treasury Inflation Protected Securities mutual fund.

Smart Money Tips

• Avoid high bank fees.  Do you know how much you're paying for your checking account?  It could be pretty shocking.  In fact, checking account fees could amount to well over a hundred dollars a year.  If you're paying high checking account fees, check around with other banks in town who might welcome your business with free or low-cost checking accounts.

• Your best investment is your career.  With all my prattling on about money matters, I don't want you to lose sight of your best source of future financial security and that's your career.  Keeping up to date in your field, striving to advance, and, if necessary, changing careers will provide you with the wherewithal to achieve your financial dreams.

Food for Thought

Think positively and masterfully, with confidence and faith, and life becomes more secure, more fraught with action, richer in achievement and experience.

-Eddie Rickenbacker

Money Can Be Funny

If medical science continues to prolong human life, some of us may eventually pay off the mortgage.

-Anonymous

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