Don't let inflation deflate your investments

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Inflation is the monetary thief that robs consumers of their current purchasing power and diminishes the future value of retirement nest eggs."You need to invest to keep up with inflation," said Roch Tranel, president of Tranel Financial Group in Libertyville, Ill.The impact inflation has on a person's investment portfolio depends on the type of securities they own. The mix should be capable of beating the rate of inflation, which is currently pegged at 5 percent.If a bond or CD pays 4 percent annual interest and inflation is running at 5 percent, the investor actually loses 1 percent on the investment each year to inflation -- and still must pay taxes on the 4 percent gain, which results in a greater loss."Inflation is a compelling reason why clients would want to have a stock exposure in their portfolios, depending on their age," said P.J. DiNuzzo, president of DiNuzzo Investment Advisors Inc. in Beaver. He recommends holding 30 percent in stocks.The Bureau of Economic Analysis reported last week that inflation was steadily intensifying. Higher energy and food prices pushed inflation up 0.8 percent in June, which was the biggest monthly increase in 27 years.When stock prices rise due to inflated earnings and revenues, it becomes difficult for investors to get a clear picture of a stock's true value."What investors should be worried about is what are the future expectations for future earnings," said Brian Levitt, an economist and vice president of Oppenheimer Funds in New York. Hrecommends biotech and medical companies for success."For investors in the equity markets, they need to think about which companies can grow their businesses in such an environment," he said. "Who has pricing power, foreign exposure and the ability to grow a business in a declining U.S. economy?"Many investors prefer the safety of bonds. But inflation can devastate a bond portfolio."There's nothing worse for a bond portfolio than inflation," said David Twibell, president of Colorado Capital Bank in Denver. "It eats away at the purchasing power of the portfolio, and as the Fed raises rates it also decreases the value of the bonds." He recommends floating rate bonds, which are corporate bonds with interest rates that increase based on the London Interbank Offered Rate, so they don't lose principal value.Bond investors also might consider Treasury Inflation-Protected Securities, known as TIPS, which provide protection against inflation. The principal increases with inflation and decreases with deflation, as measured by the Consumer Price Index..When there is an increase in the supply of money and easy availability of credit, there is a general rise in the demand for goods, which results in inflation."I expect inflation to continue because the Fed is under pressure to keep interest rates low to combat the credit crisis," said Addison Wiggin, author of "The Demise of the Dollar ... And Why It's Great for Your Investments."Wiggin recommends that investors focus on buying assets such as natural resources, commodities and gold, because when inflation is rampant prices for those asset classes benefit.James Turk, founder of GoldMoney.com, based in the British Channel Islands, and author of "The Collapse of the Dollar," said the best inflation hedge is not stocks, but gold. Although gold does not pay a dividend or generate a stream of income, investors who buy the metal are betting that its price will appreciate faster than the rate of inflation.John Schloegel, vice president of investment strategies at Capital Cities Asset Management in Austin, Texas, is predicting, however, that inflation will decrease in the months and years ahead. He says investors should be concerned afout deflation."We are in a recession and that will lead to a decline in other high-cost items such as gas and groceries," he said. "Those prices will come down in the next six months without the Fed's taking any further action on interest rates."Bob Hapanowicz, president of Hapanowicz & Associates, Downtown, believes, however, that interest rates will go up in response to rising inflation."We think the way to hedge portfolios from the effects of inflation is to invest in carefully selected stocks," he said. "Stocks have historically since 1925 averaged about 10 percent a year, and that beats inflation over that time period by 3.5 percent. He also suggestions ETFs, such as Rogers Global Commodity Index (RJI), protected bonds and REITs. Ultimately, investors must balance their financial strategy to outpace inflation with their own tolerance for risk, said Julie Murphy Casserly, president of JMC Wealth Management in Chicago and author of "The Emotion Behind Money: Building Wealth From the Inside Out.""Stocks," she said, "are the only thing shown to outpace inflation in the last 100 years. Bonds, savings accounts and CDs are terrible now. I think we are doing a great job as a country (with inflation) compared to the 1970s by keeping interest rates low. But we are in uncharted waters and only time will tell."(Tim Grant can be reached at tgrant(at)post-gazette.com).(Distributed by Scripps Howard News Service, www.scrippsnews.com.)